Wayfair (W -8.36%) has been among the worst-performing tech stocks in the current market downturn. Since indexes started moving lower in early 2022, the e-commerce specialist has shed nearly 80% of its market capitalization. Wayfair had been a nearly $20 billion business at the pandemic peak and is now valued at less than $5 billion.
A valuation slump of that level doesn't happen unless there are major growth and earnings issues in the underlying business. But there's a lot more to Wayfair's investment potential. Let's take a closer look at the core challenge, and opportunity, around this beaten-down tech stock.
1. Wayfair faces a real challenge
Wayfair was a major early beneficiary of pandemic-related demand swings. Its e-commerce focus, combined with its wide selection of home furnishings, put it in an ideal position when consumers were looking to upgrade their homes during lockdowns.
Yet it's now clear that much of its 2020 growth (when sales soared 45%) was a result of pulling forward gains from future periods. Wayfair posted a 3% sales drop in 2021 and an 11% decline in 2022.
There are two encouraging signs on growth. First, Wayfair is winning market share today even though the wider industry is still contracting. Second, repeat orders are still growing as a proportion of all orders. This success could be the framework for re-engaging lost customers over time.
2. Financial progress
It takes time to reduce costs after a sharp demand drop, and that's a major factor pushing shares lower since early 2022. Wayfair posted a $1.3 billion net loss in fiscal 2022, and it burned through $670 million of operating cash compared to positive cash flow of $410 million in the prior year. The company began fiscal 2023 with more losses on both scores.
W operating margin (TTM) data by YCharts. TTM = trailing 12 months.
On the bright side, gross profit margin is ticking higher and costs are trending lower. Management believes profitability on an adjusted basis is on the way in the second quarter, marking an important step toward a return to sustainable earnings. "We have always known ... the Wayfair model is inherently profitable and that there is considerable opportunity in front of us to rapidly drive further margin expansion," CEO Niraj Shah said in early May.
3. No need to rush
There are enough warning signs about the business to keep investors firmly in wait-and-see mode, though. Wayfair is still losing customers at a distressing pace, with a roughly 15% decline in active customers the first quarter. And the business isn't in positive territory on earnings or cash flow, giving investors major reasons to be cautious as the economy potentially approaches a recession over the next few quarters.
Investors with a high threshold for risk might be tempted by Wayfair's low valuation. Shares are trading for about 0.4 times sales, down from a pandemic-high price-to-sales ratio of 1.5. The home furnishings e-commerce niche has a bright long-term future as well, and the company has a shot at playing a central role in the industry's growth over the next decade.
It's too early to feel confident in this bullish thesis, though. Instead, keep an eye on metrics like customer levels and cash flow for signs that Wayfair is finally climbing out of its multiyear growth slump.
