It's not hard to see why Wall Street is avoiding Wayfair (W 3.24%) stock today. Growth trends look awful compared to a year ago, and the e-commerce specialist is losing money at a time when consumer demand might be slowing even further.
The good news is that Wayfair might continue winning market share in the home furnishings sector so the inevitable industry rebound puts it back on pace to dramatically increase sales over the next decade.
Let's take a closer look at whether that bullish outlook makes sense today, or if Wayfair instead is likely to be a drag on investors' portfolios from here.
The bearish case
You don't have to squint to see evidence of the bearish growth case today. Sales are down, Wayfair is losing customers, and order volumes are decreasing. This demand slump hit at a difficult time for the business, just as spending accelerated to meet projected volume growth. Wayfair has burned through $557 million of cash in the past six months compared to a $319 million cash inflow over the same period in 2021.
W Free Cash Flow data by YCharts
Things might get worse before they get better. Inflation is pressuring consumer spending, and shoppers are likely to avoid the home furnishings space first after having prioritized that niche in earlier phases of the pandemic. The bearish case for Wayfair is that even if the company maintains a good market position, it might be a year or longer before cash flow trends look impressive again.
The bullish case
Wayfair's demand slump looks much better in context. The $12 billion in annual sales that Wall Street expects this year would mark a disappointing drop from the $14 billion the company achieved in each of the last two years. But it would still be much higher than the $9.1 billion that Wayfair booked in 2019, before the pandemic struck.
NYSE: W
Key Data Points
Shoppers aren't abandoning the platform, either. Wayfair handled 10 million orders in Q2, with 79% of those being repeat orders from established customers. Average order value jumped to $330 from $278 a year earlier as prices rose. "Consumers remain engaged and responsive," CEO Niraj Shah said in an early August financial filing.
Those gains suggest that Wayfair can recover its momentum toward the over $100 billion in annual sales that management believes is possible in the next decade -- once the pressure lifts on the wider industry.
Is it a buy?
The good news is that investors are receiving a hefty discount to take on the risk that this rebound won't arrive. Shares are valued at 0.4 times annual sales compared to 0.7 times for Target. Wayfair had been valued at nearly twice sales as recently as early 2022.
That cheaper valuation might look like an absolute steal if, a year from now, sales are back to normal growth patterns that reflect a steady shift toward online purchasing for home furnishings products. A deeper or more prolonged recession, on the other hand, could keep Wayfair stock returns trailing the market through 2023 and beyond.
Its net losses today likely have most investors leaning away from the stock right now. Wayfair might look more compelling after the company makes the necessary cost cuts to get profitability back on track. Until then, keep this stock on your watchlist but out of your portfolio.
