January isn't over yet, but Wayfair (W 1.96%) stock is already up a whopping 71% to start the year.
After shares of the online home furnishings retailer plunged 83% in 2021, the recovery seems to show that investors now see an opportunity in the beaten-down growth stock.
Much of Wayfair's gain this year came in a two-day stretch, when the stock jumped 52% after the company announced the next step in its plan to cut costs by $1.4 billion a year. Management said that it would lay off 1,750 employees, or 10% of its workforce. This includes 1,200 corporate employees, or 18% of its entire corporate staff. Those employees tend to be higher paid, and the company said that including the round of layoffs it announced in August, it's now cut labor costs by $750 million annually.
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Even better, management said the company would hit its target of breakeven on an adjusted EBITDA basis earlier in 2023 than expected, and that gross revenue trends improved from November to December, a sign the company may be bouncing back from the depths of the pandemic hangover.
Wayfair's sales boomed during the early stages of the pandemic, as the company was perfectly positioned at the intersection of e-commerce and home goods, two in-demand categories during the pandemic lockdowns.
However, as the economy reopened and consumer spending habits shifted, Wayfair's momentum came to a halt. Its revenue declined for the last six quarters in a row.
A second chance
Except for the few quarters during the pandemic where sales boomed, Wayfair has never been profitable. But the company grew to the point where it has a competitive advantage as the leading pure-play home furnishings brand, with more than $12 billion in revenue in its last four quarters. With more effective cost management, it should be able to turn a profit.
Wayfair also seems likely to benefit from the collapse of Bed Bath & Beyond. The brick-and-mortar home furnishings retailer has warned that bankruptcy could be imminent. Bed Bath & Beyond reported a 33% decline in revenue in its most recent quarter to $1.26 billion, and as that company continues to give up market share, Wayfair seems likely to be a beneficiary.
Most home goods retailers have struggled with difficult comparisons with prior-year sales, and Wayfair should get a natural tailwind as it rolls off weaker comparisons, though it may take a turnaround in the economy for the company to deliver strong growth again. Analysts expect flat revenue growth for the current year, but those estimates could improve after the company's recent update.
Is Wayfair a buy?
Even after Wayfair bounced 70% this year, the stock looks cheap at a price-to-sales ratio of just 0.5. It's trading at a significant discount from where it was before the pandemic started, indicating significant upside potential, especially if Wayfair can demonstrate consistent profitability and free cash flow.
Before the pandemic, Wayfair had consistently grown revenue by 30% or better. The company could get back to a growth rate at least near that, if not above 30%.
More broadly, e-commerce growth should eventually rebound as well. There's still a lot of market share in categories like home goods, which are still mostly sold through brick-and-mortar stores. As technology such as augmented reality makes online shopping for home goods better and delivery speeds improve, Wayfair should be able to gain market share.
It's unclear if that will happen this year, but over the long term, Wayfair will almost certainly return to growth. With its newfound focus on profitability, the company looks like a good bet to gain from here.
It may take more than a year for the stock to realize those gains, but at the current price, the upside potential over the long term looks considerable for Wayfair stock.
