What's happening: Shares of Wayfair (NYSE:W) fell 11.7% on Monday, punctuated by a sharp drop and heavy trading volume just before lunch. The drop erased what remained of Wayfair's August gains, started by a fantastic second-quarter report near the middle of the month.
Why it's happening : Today's radical haircut comes courtesy of a research report from noted short-selling firm Citron Research. Published via a quick tweet at 11:13 AM, the Citron report claims that Wayfair is "worth less than $10 a share."
The ultra-bearish report went on to say that Wayfair's business model is essentially a smaller-scale version of Overstock.com,which commands less than one-sixth of Wayfair's market cap today. In Citron's view, that head-to-head comparison reveals that Wayfair's fair value should be based on a similar price-to-sales ratio. That would land the stock at less than $10 per share.
At least two law firms were quick to file lawsuits based on the Citron report, each one seeking class action status on behalf of Wayfair investors.
All of this is par for the course when Citron points an accusatory finger at some unfortunate firm. The unusual bit this time is Wayfair's relatively large scale; Citron typically targets micro-cap companies, often operating from far-off locales like China.
Citron hits the occasional home run with these deeply negative reports, but the firm's overall track record is spotty at best. More research is always required before biting on the firm's panic signals. For now, investors still haven't seen any official response from Wayfair's management, which would be a good starting point for deconstructing Citron's claims.