Furniture and home goods retailer Wayfair (W -2.13%) surged to record highs during the pandemic. But as consumers returned to offline shopping, the air quickly came out of the stock. It now sells for over 90% below its all-time high.
Despite that drop, it certainly carved out a niche as the Amazon of furniture. The question for investors is whether the internet and direct marketing retail stock was a flash in the pan or can stage a comeback. Let's take a look.
How Wayfair stands out
Admittedly, one might forgive investors for wanting to avoid Wayfair. Since it looks like a competitor of Amazon on the surface, many investors might write it off. Well, not so fast. While Amazon has developed an extensive footprint, it did not design its operations to handle bulky items.
This allowed Wayfair to develop a niche by creating an infrastructure to ship such goods. Instead of buying and selling goods, it makes money by featuring items from manufacturers and shipping their products for a revenue cut.
Wayfair's rise and fall
This approach proved fruitful to the company and its stockholders during the pandemic. Shoppers helped its revenue grow by 55% in 2020, allowing Wayfair to turn a $185 million profit. Its stock experienced even more growth. From a low of just under $22 per share in March 2020, the shares would rise to an intraday high of $369 per share the following January.
However, the trend began to reverse as customers returned to physical stores. Sales fell 3% in 2021, and that modest decline was enough to return the company to net losses. By the beginning of 2022, the stock had dropped below $200 per share.
Conditions have continued to worsen. As of the end of the third quarter of 2022, revenue dropped 13% in the first nine months of the year compared with the year-ago period. And the stock has fallen to just above $30 per share. This is a drop of more than 80% since the beginning of 2022 and not far above the lows in March 2020.
Can Wayfair save its stock?
The state of Wayfair stock leaves investors in a conundrum. They can now buy the stock at levels they would have fantasized about in early 2021. Nonetheless, with sales falling and a need to adjust capacity accordingly, investors seem to have stayed away despite the discounted prices.
Additionally, the customer count fell in Q3 by about 23% year over year to just under 23 million. And with fears of a looming recession, shoppers will probably not spend as much on furniture and home goods. However, 23 million still represents a significant following, and the proportion of repeat customers rose to almost 78% versus just above 76% in the year-ago quarter.
Moreover, with the average order value rising 15% to $325, the customer base has increased its spending. The losses should also abate if Wayfair meets its goals of $500 million in cost savings and become cash-flow positive soon after 2023.
Considering its business conditions and potential to return to growth, investors should probably stay on the sidelines for now. While it holds potential, calling it one of the best stocks of 2023 is premature. Nonetheless, prospective buyers should watch this stock. If it can reverse sales declines and turn cash-flow positive, the stock could eventually take off again.