Wayfair (W +0.40%) investors had a brutal 2022. The e-commerce stock, which was a huge winner in the early phases of the pandemic, has plunged by over 80% through mid-December as demand trends worsened. Wayfair has seen order volumes plunge just as spending accelerated on its supply chain infrastructure.
Those factors will likely continue hurting the business in 2023. But is the long-term outlook still bright for this company? Let's take a closer look.
More pain ahead
Wayfair's last few quarterly updates suggest that there will likely be more pain ahead for the business in 2023. The company shed 23% of its active customers year over year in Q3, showing essentially no improvement compared to the prior quarter's 24% slump.
NYSE: W
Key Data Points
Shoppers are far less interested in buying home furnishings today, as peers like Target have confirmed. They are even less excited about purchasing these products online after years of elevated e-commerce demand.
As you might expect, this sales pressure is seriously impacting Wayfair's earnings power. Operating losses through the nine months ending in late September landed at $1 billion compared to a $100 million gain in the year-ago period.
The immediate challenge
As a result, Wayfair's focus for the next year or so will be on slashing costs. CEO Niraj Shah said the management team is working hard to get the company back into positive cash flow "in short order." That step will require aggressive cost cuts and the unwinding of a few promising growth initiatives that the company started back when sales trends were much stronger. But it's the right move in today's tougher selling environment.
Management hasn't changed its official long-term outlook that sees the business potentially crossing $100 billion in annual sales over the next decade. Major tailwinds in this push include Wayfair moving into new markets and a steadily growing home furnishings category in the online selling space.
But that target looks questionable now, given that sales in 2023 will likely fall over 10% to around $12 billion, according to Wall Street analysts. In the prior two years, revenue didn't budge at roughly $14 billion. In the end, it's hard to see a clear path toward much bigger sales in the context of several years of weakness.
The stock's value
The stock's slumping valuation might tempt investors. You can own shares for about 0.3 times annual sales. That premium was closer to 2 times sales just a year ago. That valuation will look like a steal if Wayfair can quickly return to its prior growth pace after the current cyclical downturn ends.
The company's net losses make it hard to jump on that bullish thesis right now, though. Wayfair is currently playing defense due to its heavy financial pressures. That posture might make it hard for management to make the type of long-term investments that would prepare the company to lead the industry through the next demand upswing.
As a result, investors might want to watch this stock for signs of earnings stability before purchasing shares. Wayfair was a leader in an attractive growth niche before the pandemic and through most of the 2020 to 2021 selling period. But its competitive position, and the wider home furnishings industry, isn't nearly as attractive today.
