As a value investor, you may overlook Wayfair Inc. (W, Financial). However, the same could have been said for Amazon.com Inc. (AMZN, Financial) in the early 2000s, which, if you are buying that stock today, you have already missed out on most of its performance gains.
Short sellers are crushing Wayfair's stock
With that in mind, I do like being a contrarian, which I realize is not always a good thing. Going against the herd, so to speak, wrecked a lot of investors during the meme stock era of the last couple years especially. And, in the case of Wayfair, short sellers make up 40% of the float. They only see red and they have been right so far. The question is, will they be right going forward? The stock is already up $12 from its lows in early November.
There are facts that cannot be ignored. A slowdown across the housing market is cooling demand for furniture and home goods, which has sent the Boston-based online retailer's stock way down - 78% in the last year to be exact. However, when the market for housing spending returns to normal, which it will, Wayfair is poised to regain market share and resume growth in the diverse home goods industry, and it is likely that short sellers will cover their positions.
Wayfair has a solid business
As a business, Wayfair stands out thanks to its wide range of curated products (14 million items) and its efficient logistics network, which allows for faster delivery of both small and large items compared to its competitors. This speed of delivery is achieved through fewer handling points, reducing damage and ultimately building its reputation through a positive customer experience.
Wayfair operates a family of brands:
- Joss & Main operates as a flash-sale site, offering limited-time sales on items such as furniture, decor and home improvement products.
- AllModern targets consumers who are looking for stylish, high-quality and affordable modern and contemporary home furnishings.
- Birch Lane sells traditional and farmhouse-style furniture and home decor.
- Perigold offers a wide selection of luxury furniture for customers who are looking for high-end, unique and luxury home furnishings, exclusive pieces and one-of-a-kind antiques.
- Wayfair Professional is an all-in-one membership service to help with design, planning, renovation and construction for clients.
Each of the Wayfair brands serves a unique niche and is curated to include pieces from established brands as well as unique and exclusive items from emerging designers. I do think the company provides a superior shopping experience and products people want. Wayfair also offers specialist support and its review section seems to have created a community-like environment, making it much less mechanical than Amazon.
The biggest challenge Wayfair has versus other competitors in this space comes down to convenience. When a consumer buys something from Target (TGT, Financial) or Walmart (WMT, Financial), they have a physical store to pick it up from or bring it back to. Wayfair offers nothing like that yet.
Wayfair has competitive advantages
A key advantage for Wayfair comes via a network of more than 23,000 suppliers, which it manages through its own logistics platform called CastleGate. This allows the company to control the supply chain, improve shipping times and increase efficiency.
In turn, suppliers benefit from services such as freight forwarding and fulfillment, which are provided through 16 fulfillment centers. In addition, Wayfair is one of the top 20 importers in the U.S. by volume. It has 23 million active users who spend, on average, $550 per year, versus 10 years ago when just 1.3 million users spent $300 per year.
Further, its two-day delivery service can reach more than 95% of its customers, which is on par with Amazon.
The bottom line is all the company has to do is survive the short-term pain. With Bed Bath & Beyond (BBBY, Financial) potentially going bankrupt, Wayfair and others may pick up more customers.
Wayfair is still growing
From a financial standpoint, Wayfair generates $3.9 billion in gross profit on $12.4 billion in top-line revenue, albeit currently at a loss of $1.1 billion. The company has over $4 billion in total debt, but maintains a healthy $1.29 billion in cash, and it is still growing.
In the last 10 years, the company’s revenue has grown from $600 million to $12.4 billion - that’s 35% a year. Additionally, its gross margin has increased from 24% to 27%, yet the stock since its initial public offering is up a measly 29%. More importantly, management maintains its goal of $100 billion in sales in the next decade. This growth is expected to be driven by expansion into new markets and an increase in the home furnishings category within the e-commerce industry. If Wayfair is successful and is still valued just on a price-sales basis, then 30% of $100 billion would be a 7.5 times return.
All that said, I realize this may be too optimistic of an approach, but from an investment standpoint, it does not really matter what the company has or has not done to date. What matters is whether it will be able to use the brand and structure it has built to keep growing. I suspect that Wayfair will be doing twice as much in revenue in the next five years and, if it can go from red to black on the bottom line, the stock will be significantly higher.
