Investors are conflicted about Wayfair (W 2.08%) stock. Yes, shares have more than doubled this year through early July. But the stock is still down over 70% since hitting its pandemic high. The e-commerce specialist is well-positioned in an industry that might see fantastic growth over the next few decades. Its earnings potential is attractive, too, given its capital-light selling model.
On the other hand, sales haven't increased in years, and Wayfair is generating painful losses right now. With that mixed picture in mind, let's look at whether the stock is a buy, sell, or hold right now.
The latest results
Wayfair's last few quarterly reports haven't contained much good news for investors, except regarding cost cuts. The company continued to shed customers in fiscal Q1, with active shoppers falling 15% to 21.7 million. This metric peaked in 2020 when pandemic demand lifted sales to over $14 billion from $9 billion in 2019. But Wayfair has posted two consecutive years of declining sales and is on track for a third one in 2023.
The news isn't quite as bad when it comes to profitability. Sure, gross profit margin has declined in each of the last two years. But Wayfair's 28% gross margin is still well above the 24% level that shareholders saw before the pandemic. Unfortunately, costs have expanded more quickly as the company invested heavily in its delivery and IT infrastructure. Its net loss was $1.8 billion last year and landed at $355 million in the most recent quarter.
Hold the stock
Those factors all suggest the stock is a hold at best. That's especially true given that Wayfair's shares have soared in the past few months. At the start of 2023, you could have purchased the stock for about 0.3 times sales, reflecting a potentially attractive discount. But that valuation has jumped to 0.6 times sales.
W PS Ratio data by YCharts
You could own Walmart for about that same valuation, and you'd have a much more stable and more profitable retailer in your portfolio. You'd also have steady dividend income, which isn't likely to come from Wayfair for many years. The main factor that Wayfair brings is its potential for faster growth once the home furnishings industry stabilizes and returns to expansion following the pandemic hangover.
What to watch
Investors will get more information about the business when Wayfair announces fiscal Q2 results in early August. Most Wall Street pros are bracing for continued sales declines -- on the order of about 7% -- and significant losses.
Management might sound a positive note about the return to profitability on the way this year, but only on an adjusted basis. And it's unclear how easily Wayfair can reengage some of its lost customers once demand begins rising again for home furnishings and home upgrades. That's why the stock seems too risky to call it an attractive buy right now.
There are better retailers available at decent valuations presently. Companies like Tractor Supply and Ulta Beauty are winning market share, growing, and generating solid operating profits. Focus on retailers like that, and simply watch Wayfair stock for now.
