What happened
Shares of furniture e-commerce company Wayfair (W -5.13%) dropped like a rock on Thursday after the company closed 2022 with a stunning net loss of over $1.3 billion. As of 2 p.m. ET, Wayfair stock was down by 28%.
So what
In 2022, Wayfair's net revenue fell nearly 11% year over year to $12.2 billion. The decline was expected as demand for Wayfair's services had surged abnormally high during the pandemic and pulled some sales forward.
However, Wayfair's management has been talking about how it would cut costs and get to breakeven for adjusted earnings before interest, depreciation, and amortization (EBITDA). And the stock had flown higher in recent weeks as Wall Street analysts raised their price targets for Wayfair stock, anticipating better profitability.
With heightened expectations for profits, the market seems caught off guard that Wayfair had an adjusted EBITDA loss of $71 million in the fourth quarter alone. Moreover, its Q4 net loss of $351 million was its second-worst quarterly loss as a public company.
Now what
Wayfair's management insists it's on the path to positive free cash flow. But I believe revenue growth will need to reaccelerate before that happens. Wayfair has an inventory-light business model that receives customer orders upfront. This means it gets paid before paying third-party suppliers. This dynamic allows for better cash flow when revenue grows but leads to negative cash flow when revenue falls.
For this reason, Wayfair's shareholders should monitor the company's accounts payable. The company's accounts payable increased in Q4, which temporarily boosts cash flow. And that's notable considering free cash flow was still negative for the quarter even though it had this benefit.
Personally, I believe Wayfair is a stock that needs to show more progress before investors can confidently buy for the long term.
