Wayfair (W 0.01%) can definitely compete for the title of worst stock to own of 2022. Its value has plunged more than 80% this year, and shares are trading a good deal lower than they were prior to the pandemic, even though sales are a good deal higher.

Investors are clearly unenthused. Is Wayfair a well-run company that has been affected by outside forces? Or has its model run dry? If the company demonstrates progress next year, its stock could seriously soar higher.

A demonstrated e-commerce model

Wayfair is an online furniture retailer with $12.65 billion in trailing 12-month sales. It works primarily as a dropship company, which means that it doesn't actually buy inventory and resell it. Rather, it uses its website as a platform for furniture manufacturers to feature their products, and when a sales goes through, Wayfair ships the product from the warehouse to the customer.

There are many advantages to this approach. It cuts down on expenses, because it doesn't have to invest in leasing properties, and it doesn't purchase inventory until it has already been paid for by the customer. This also gives it more leverage to invest in its distribution network and technology, creating a cycle of satisfied customers and higher sales. Finally, its gross margin isn't weighed down by high inventory costs.

Wayfair was demonstrating strong growth even before the pandemic, but sales skyrocketed in early 2020 when people were at home and spending on home improvement. However, Wayfair is now past that phase and it is dealing with the enormous headaches of slowing growth and inflation.

A victim of its own success, and other headwinds

Wayfair's growth was so strong in 2020 that it was unsustainable. Sales already began to decline year over year last year, and this decline continued into 2022. In the second quarter, revenue decreased 15% year over year to $3.3 billion, and active customers decreased 24%. It was a pretty depressing earnings report. One glimmer that stood out was average order value, which increased from $278 last year to $330 this year. That seems likely due to the more affluent customer's ability to keep spending in this environment, while customers who generally spend less bow out altogether.

Beyond that, like many other companies, Wayfair expanded to meet heightening demand and now needs to scale back down and cut expenses. Finally, as inflation intensifies and people are no longer stuck at home all day, they are reconsidering large or unnecessary purchases, which characterizes much of Wayfair's stock. These are serious setbacks for Wayfair.

Why it could seriously bounce back

Investors typically rate a company's progress by measuring growth year over year. That worked against Wayfair over the past two years as it faced unprecedented growth from the year before. Going into 2023, it has the chance to demonstrate progress, as compared to the previous year. Investors typically appreciate and reward this kind of progress.

Wayfair's model still looks viable as a growth engine. It sees an addressable market that it expects to grow to $1 trillion by 2030, and it's well-positioned to capitalize on that with more than 24 million active customers. 

It works with more than 23,000 suppliers, and these companies are relying on Wayfair to move what are now excess goods, since other companies are over-inventoried. These give Wayfair leverage in these relationships. It also works under several banners to reach customers at different price points, which hedges its business in difficult times and allows it to target almost any customer when times are better.

In other words, the hit to Wayfair's business does indeed look temporary. In the meantime, management is working on maintaining its high standards and keeping customers satisfied so they stick around to spend more when the economy shapes up.

What about the stock?

Wayfair stock being down more than 80% is actually an improvement from earlier lows, when it was down close to 90%. Some positive reports from banks and spending trends have recently given a small lift to the market and to investor sentiment. 

As far as 2023 goes, Wall Street is confident in Wayfair stock. Analysts expect it to gain as much as 326% over the next 12 months.

With sales falling and the short-term outlook not seeming too bright, it might be too early to buy Wayfair stock. But investors should keep Wayfair on their watch lists, as it might turn out to be one of the best stocks of 2023.