Wayfair (W 2.08%) stock has been on a tear lately, having sailed past the market's 15% return through early July. There's potentially room for much bigger gains ahead, too. The stock remains down by over 70% from its pandemic high, after all, and the picture is brightening around economic growth in its key U.S. market.
Investors should be extremely cautious about buying into that rebound thesis, though. While the company maintains a premium position in an attractive e-commerce niche, customer-engagement trends aren't pointing to a solid recovery any time soon. Let's take a closer look.
Latest trends
Wayfair announced in early May that sales fell 7% globally but declined by only 5% in the core U.S. market. That result marked an improvement over the 11% drop that the company endured for the full fiscal 2022 year. It helped spark a rally in the stock, which has risen over 80% so far in 2023.
Investors were also happy to hear about management's progress in cutting costs and raising prices. Wayfair executives highlighted the success they've made here in recent months, which put the company just below the breakeven point in Q1 on an adjusted-earnings basis. "This was a strong quarter for Wayfair," CEO Niraj Shah said in a press release.
The red flag
It's encouraging to see Wayfair move steadily back toward profitability, but the bigger problem is that growth is still under extreme pressure. The company counted 21.7 million active customers in Q1, down 15% from the prior year. The rate of ordering per customer ticked lower, too, while average order values remained steady at $287.
Zoom out, and the expansion picture looks even worse. Most Wall Street pros are looking for Wayfair to achieve under $12 billion in annual sales this year. That would mark its lowest annual haul since 2020, when revenue peaked at $14 billion. A third consecutive year of falling sales is not a sign of great operating fundamentals.
The bullish case
Bulls will point out that Wayfair is winning market share even as the industry shrinks following big gains during the pandemic. The company has a good shot at significantly boosting annual sales over the next several years, too, as more home-furnishings sales shift toward the online selling channel. Aggressive cost cuts that are happening right now will pave the way for much better profitability in a few years, as well.
But investors should be cautious with this stock at a time when its customer base is shrinking. This challenge is compounded by financial pressures, including net losses and negative cash flow.
It might be tempting to consider this stock a steal at its current valuation of about 0.5 times annual sales. Investors were paying nearly 3 times revenue during the pandemic, after all. But Wayfair has to earn a higher premium by accelerating sales growth and establishing a clear path back toward sustainable profitability. Until that occurs, investors should stay away from this rallying stock.
