Wayfair (W -8.36%) shares are trading near the lows they set during the first acute phases of the pandemic. That price slump has occurred even though the e-commerce giant has a much bigger sales base today than it did back in early 2020.
The company is clearly going through a rough patch today as consumers change their spending patterns back toward in-person shopping. And the home-furnishings industry is growing more slowly than categories like travel.
A rebound is inevitable over the next several years, but will Wayfair be able to capitalize on it? Let's take a look.
The latest trends
The latest trends suggest that it will be several quarters before Wayfair is back to steady growth in sales and earnings. Revenue is down 14% over the last six months, and Wall Street is looking for annual sales to decline to about $12 billion this year, compared to $14 billion in each of the last two years.
Compounding this demand challenge is that Wayfair, like many e-commerce companies, spent much of the last two years investing in its infrastructure on the belief that much of the pandemic sales spike was permanent. That false assumption is a key factor behind the company's return to net losses, which amounted to $6.62 per share in the past two quarters, compared to a $1.44 per-share profit a year earlier.
W Operating Margin (TTM) data by YCharts.
Wayfair's operating cash flow trends look just as bad today, with $341 million of outflow in the first half of 2022.
The optimistic outlook
The dust will settle soon from these pandemic-related demand shifts, though, and Wayfair has a good shot at leading the industry out of the latest decline. Nearly 80% of its orders today are coming from repeat customers, for example. And the company counts over 20 million active customers today, who are spending more than $300 per order -- up from $257 per order a year ago.
Those factors support management's bullish outlook, which calls for sales potentially reaching over $100 billion by 2030. While the home-furnishings space is going through a growth hangover today, it's likely that it will soon resume its steady move toward online shopping, just as other categories, like consumer electronics, have done. Wayfair's prime position in the market should allow it to take more than its fair share of those shifting dollars over the next several years.
Looking ahead
While Wayfair is likely to have a higher sales base in 2025 than the current $12 billion, operating trends might get worse before they get better. Economic growth is slowing, and a recession might be on the way -- if not for the broader market, then at least for the home-furnishings niche.
As a result, investors might want to watch this stock from the sidelines for a few quarters, at least until Wayfair begins approaching positive cash flow again. The stock's 80% decline in 2022 prices is a huge negative that might not change over the next year. There are more attractive growth stocks for investors to prioritize today that are generating steady earnings and are well protected against any oncoming recession.
