Investors are becoming much more optimistic about Wayfair's (W 2.08%) business, even though the e-commerce retailer is struggling right now. Shares have more than doubled so far in 2023, in fact, compared with a 34% increase in the Nasdaq Composite.
That wider tech rally surely played a key role in Wayfair's bounce, and the stock is still more than 60% below the all-time highs it set during the pandemic. But Wall Street also has some specific reasons to believe the home-furnishings retailer will bounce back following the current growth hangover.
Let's look at a few reasons investors might want to avoid this stock for now, along with one big reason to consider owning it.
Sell for the poor engagement
Wayfair's sales trends appear to be stabilizing, with revenue down just 5% in the core U.S. market last quarter. Those year-over-year declines were closer to 20% during parts of 2021 and 2022 following huge demand surges during the pandemic. And most Wall Street pros are looking for sales to decline by just 3% in the current fiscal year, setting the stage for a return to growth in 2024.
Yet look closer into the demand trends, and you'll see more reasons to be pessimistic about the business. Wayfair's customer base shrank by 15% last quarter. The shoppers who remained engaged ordered less often, too. And average order value was flat even as prices have increased. Overall, these metrics describe a company that's still a long way from achieving steadily rising engagement.
Sell for the operating losses
One of the main reasons to like Wayfair is its relatively capital-light selling approach. In contrast with a fully integrated furniture producer, the company can avoid maintaining huge production and warehousing facilities, reducing risk and the need for lots of cash.
W Operating Margin (TTM) data by YCharts
But that approach didn't spare investors from the pain of losses in recent years. Wayfair generated $1.3 billion of red ink in fiscal 2022 and lost $131 million in the prior year.
Despite aggressive cost cuts this year, management is still signaling another year of losses ahead in 2023, although Wayfair should return to positive territory on a non-GAAP basis. There's little reason to be excited about an e-commerce stock that can't reliably produce positive earnings.
Buy for the future
Wayfair has its eyes on a piece of a massive industry, and shareholders could see excellent returns from holding the stock as it makes progress toward that goal. The home-furnishings category is likely to pass $1 trillion of spending in its main markets of the U.S. and Europe by 2030, management estimates. Its prime position in that industry, which is steadily shifting toward online sales, gives it a good shot at improving on its $12 billion annual revenue footprint over time.
Investors might have more reasons for optimism here when Wayfair announces its Q2 results in early August while updating its short-term growth outlook. Yet for now the stock seems highly risky because of its poor engagement levels and continuing losses. Keep this business on your watchlist, but not in your portfolio, for now.
