The S&P 500 was making progress heading into March, but it dropped again after the fall of Silicon Valley Bank and the subsequent banking crisis. Market indicators aren't buoying investor confidence. Inflation is slowing but still impacting prices and wallets, and retailers are still feeling the pinch.
Wayfair (W 1.96%) is one of them. It was a breakout stock at the beginning of the pandemic, but it's fallen hard -- down 72% over the past year and flat year to date. However, Wall Street sees a huge upside here. Should you buy?
Wayfair's disappointing status
Wayfair was gaining momentum before the pandemic, becoming an important player in the furniture industry. It operates what at the time was an innovative retail model of being completely online without the heavy expenses of physical stores.
It also uses a dropship model, which means it doesn't actually buy most of its merchandise and then sell it. Instead, it works as a third-party platform for literally thousands of suppliers, and when a customer places an order, Wayfair "buys" the product with a markup and ships it. It has developed its own highly efficient delivery system that more and more suppliers are using to get products quickly and safely to buyers.
This model also takes out what are typically high costs associated with buying and keeping inventory on Wayfair's balance sheet.
Management has refined its technology so customers have a clear picture of what they're ordering, how it looks and feels, and how it can fit into their home setup. This business sounds like a no-brainer success, and sales were steadily rising prior to the pandemic.
However, expenses were piling up as Wayfair worked to perfect its systems. Demand skyrocketed during the pandemic, and Wayfair briefly became profitable as well as cash-flow positive.
But revenue has been falling since then as major supply chain issues constrained already declining demand. The 2022 net loss came in at a record $1.3 billion as Wayfair feels the pressure of rising costs and lower sales. It's no wonder investors are looking for greener pastures.
Is there a light at the end of the tunnel?
Management is working feverishly to get back in shape and start anew. It has eliminated thousands of jobs over the past year and is on track to save $1.4 billion. It's also exploring various initiatives to jump-start sales growth, including an omnichannel model that will incorporate some physical elements into the business.
Despite all that, Wayfair's financial situation is imperiled. It's long-term debt is triple its liquid cash, and it's not making any profits.
W Net Income (TTM) data by YCharts
Although it should be safe in the short term, it would have to begin to generate positive cash flow to stay afloat. The next few operating quarters will be critical to Wayfair's survival.
Is now the time to buy Wayfair stock?
There's definitely room for optimism here. The average Wayfair customer is the average American, and these days most shoppers are feeling inflation and cutting frivolous spending. When the housing market improves and the economy bounces back, Wayfair should benefit.
If it emerges from this period as a leaner company while maintaining its customer base, it should be able to start rebuilding. However, it has to get there first. At the current price, Wayfair stock trades at just 0.2 times trailing-12-month sales. That cheap price demonstrates just how little confidence investors have in Wayfair right now.
This isn't necessarily a bargain, though. Although Wall Street analysts forecast Wayfair stock to gain as much as 227% over the next 12 months, there's too much risk to say this is a great deal. However, if Wayfair's performance does begin to improve, it could become a great deal. For now, keep it on your watch list.
