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Juhi Kulkarni
Juhi Kulkarni
Articles (282) 

Should You Follow Whitney Tilson Into Shorting Wayfair?

Lack of profitability and unsustainable business model will soon push Wayfair's stock below $10

November 18, 2015 | About:

Whitney Tilson (Trades, Portfolio) recently reveled that Wayfair (NYSE:W) is his largest short position, and he expects the shares of the company to fall under $10 within the next 12 months. This announcement came on the back of Citron Research’s claim that Wayfair is the most mispriced stock it has seen in years and gave it a price-target of $10.

For those who don’t know about Wayfair, it is a U.S.-based ecommerce company that sells furniture. Formerly known as CSN Stores, the company was founded in 2002, and now sells many other home furnishings, luggage, toys and pet items.

Both Tilson and Citron Research have a great track record when it comes to shorting stocks. So should investors follow their recommendation and bet against Wayfair?

Short answer: Yes.

Long answer

Wayfair’s share price has almost doubled in the last 12 months as the company revenue grew tremendously. The company kept the revenue-growth momentum alive as it reported another quarter reporting 77% year-over-year revenue growth. The company’s revenue came in at $594 million and beat the analysts' estimate by $70 million.

On the earnings front, Wayfair reported EPS of -13 cents, beating the consensus target by $0.11.Despite the “great” quarter, Wayfair’s shares have tumbled over 15% since the report.

Investors’ primary concern with Wayfair is the company’s lack of profitability. Wayfair’s revenue may have increased significantly; however, it is coming at the cost of profits. This simply means that the company is selling its products at an overall loss.

Growing revenue becomes less impressive when a company keeps on recording massive losses. Although Wayfair’s share price has appreciated considerably thanks to the revenue growth, this business model is unsustainable. Once Wayfair’s revenue starts to slow down, investors will realize the company’s inability to turn profitable and flee the stock.

Moreover, the company is competing against the likes of Walmart (NYSE:WMT) and Target (NYSE:TGT) and has no long-term competitive advantage over them. So, while Wayfair’s shares have appreciated due to its “impressive” revenue growth, the company’s business model is unsustainable and will lead to massive losses going forward.

Conclusion

As of now, investors are enjoying Wayfair’s strong revenue growth. However, the company is selling its products at an overall loss and its business model is unsustainable for the long-run. Wayfair’s share will fall rapidly once investors realize that the company’s business model doesn’t allow it become profitable. For these reasons, both Citron Research and Tilson are spot on about Wayfair’s overvaluation; expect to see the stock under $10 in the next 10 to 12 months. Investors should short the stock as it can return tremendous profits over a short period of time.


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