Wall Street is excited about Wayfair (W 2.08%) stock again. Shares of the home furnishings retailer have more than doubled in 2023 on hope that the worst of its growth hangover has now passed.
There are some encouraging signs about that potential operating rebound, to be sure. Wayfair recently returned to order volume growth, and its customer losses appear to be stabilizing. Cash flow trends are similarly positive, thanks to the solid progress in cutting costs.
Investors might still want to watch this stock from the sidelines, though. Let's look at three factors that make Wayfair an overly risky investment choice today.
1. It's still shrinking
In early August, management celebrated the fact that Wayfair is progressing back toward growth. "Our performance has continued to improve," CEO Niraj Shah said in a press release.
A key milestone in that recovery path was the return to order growth this past quarter as order volumes improved by 3% to reach 10 million. This uptick was an improvement over the prior quarter when volumes slipped 7% to 9.7 million.
This business isn't done shrinking, though. Average order size is down, for example, dipping to $307 in the second quarter compared to $330 a year earlier. Revenue fell in the core U.S. market and declined 3% overall. Zooming out, sales are on track to fall to $12 billion this year, for a third consecutive year of declines.
2. Its finances are uncomfortable
It is good news that Wayfair is cutting costs and focusing on balancing growth with profitability. Yet it will likely be awhile before investors see anything approaching sustainable profits from this business. Operating losses landed at $490 million in the first half of 2023 compared to $680 million in the prior-year period. Free cash flow is still negative, too.
W free cash flow data by YCharts.
On the bright side, Wayfair is finally back to generating positive operating cash flow. That metric improved to a $70 million inflow in the first half of 2023 compared to an over $300 million outflow a year earlier. The company is far from proving that it can generate sustainably strong earnings, though, which should give investors pause before considering the stock.
3. Its stock price still might not offer good value
Wayfair stock still seems expensive even though its valuation is well below the peak that investors saw back in 2021. Shares are priced at around 0.7 times annual sales right now, and there are more attractive options in the e-commerce space around that valuation.
Chewy, for example, is priced at 0.9 times sales and has remained consistently profitable through its post-pandemic growth hangover. The pet supply specialist is generating ample cash and has boosted average order spending in the past year, suggesting solid pricing power and greater customer loyalty.
It's encouraging to see Wayfair progress toward the operating rebound that management outlined last year. Under its new, lower-cost profile, the company could reasonably target much stronger annual earnings once the home furnishings industry returns to more normal growth.
Investors should avoid jumping into the stock before that recovery path becomes clearer. Wayfair to date is still headed in the wrong direction on core metrics such as profits, revenue, and order size in 2023. And there's no telling how many years it will take for the e-commerce business to make a real push toward the record annual sales haul it achieved in 2021.
The stock's rally this year seems to be built more on the hope of a rebound than on solid evidence that Wayfair's business is actually strengthening.
