Is Wayfair Stock Overvalued?

Wayfair Inc (NYSE:W) is a Boston-based ecommerce store known for its furniture and home goods throughout North America and Europe. Besides its namesake website, it also runs Joss & Main, AllModern, Birch Lane, and Perigold.

The company’s focus on providing high-quality furniture at low prices helped it maintain a stake in the retail market as Amazon.com, Inc. (NASDAQ:AMZN) largely destroyed the competition.

Its wide footprint of a dozen fulfillment centers helped it to a spike in sales related to the coronavirus lockdowns. But is Wayfair stock overvalued?

Customer Demand For Wayfair Soared

The rush in home schooling and remote work inspired people to rush to furniture stores like Wayfair to remodel their homes and adjust.

But now that the initial rush is over, Wayfair needs to find new ways to keep the sales coming. The company spends over $1 billion in marketing, and it still has a relatively small share of the retail market compared to Amazon.

It even piggybacked on Amazon’s Prime Day sale in mid-October to help make it happen. Still, the company had to furlough 550 employees in February, became the target of a conspiracy theory in June, and still hasn’t posted a profit.

Now the big conundrum is whether the Wayfair market capitalization is justified.

Why Wayfair Stock Went Up

Wayfair’s stock price hit a low in the coronavirus crash of March that sent its stock price down to $21.70 before spiking back up to nearly $350 and settling in the $300 range.

This is because the company’s second quarter earnings showed a 106.2 percent increase from the same period in 2019 to 18.9 million orders, including 5 million new customers.

This has Wayfair CEO Niraj Shah riding high with investors, especially when the company still has $2.4 billion in cash to invest in expansion.

The company has 26 million customers and is riding a strong trend toward buying home furniture to create home school and home office atmospheres. It also had a buzzy 2020 in media headlines, winning a Webby Award for Shopping Apps.

In June, however, it hit a short-lived public relations scandal in the form of a false conspiracy theory that the company was involved in child trafficking.

It happened based on a Reddit post complaining of $10,000 utility closets that were assumed to be a cover for an illegal operation. Of course, that was proven false, and the company continued to grow from the free promotion.

This gives Wayfair somewhat solid financials for the year, although it does have problems.

Wayfair Financials Are Impressive

Wayfair’s GAAP net income was $273.9 million, based on $1.3 billion in profit from $4.3 billion in total revenue in the second quarter of 2020.

This gave the company a 30.7 percent profit margin and GAAP diluted earnings of $2.54 per share. The company has $2.4 billion in cash and cash equivalents, with $1.1 billion in free cash flow.

The company’s 26 million users represent a 46 percent year-over-year increase. Still, net revenue per customer decreased 1.6 percent from the previous year.

The company also created Way Day as an attempt to siphon some of Amazon’s Prime Day traffic. In 2019, this event increased revenues by over 300 percent, and investors are hopeful the results will be similar with May Day 2020 numbers come in.

There’s still good chance the company is going to post a loss for the year, however, with analysts predicting over $3.00 loss per share. This is despite U.S. consumers spending nearly 50 percent more online in 2020.

Some analysts believe Wayfair may be overvalued by at least half. Let’s look at why.

Is Wayfair Valuation Too High?

Wayfair’s IPO occurred on August 15, 2014. It raised over $300 million at a price of $29 per share.

In the fourth quarter of 2020, W share price is trading at a price hovering around $300, with a market cap of nearly $30 billion. This is over three times the company’s $9.127 billion of net revenue in 2019, and the company earned $11.474 in the 12 months leading up to the most recent earnings report.

These increases are a welcome change for investors, and it will help pay for the company’s aggressive expansion plans.

Investors are split on whether the company is valued too high, with some rating it as a strong Buy. Others feel the company will deflate now that people have bought what they need and are heading toward the end of government stimulus packages.

When this happens, a percentage of people may end up homeless, negating the need for home furnishings. The market is also heading for a recession, so it’s possible the stock will deflate, but will it pop?

Will Wayfair Stock Drop?

Wayfair is experiencing a record high market value, and its profits aren’t necessarily matching.

In fact, the company posted quarterly losses consistently since its 2014 IPO, and a lot of its operating costs are poured into marketing.

The company spends over $1 billion a year in marketing to keep its customer base coming through. This is how it continues operating at a loss and needs loans to maintain liquidity, and there’s a good chance sales will slow with the economy next year.

Much of the growth it saw in the second quarter correlated with the government stimulus checks in the amount of $1200. On top of this, people received a variety of economic stimuli that fueled spending through the end of the year, but belts will tighten in 2021.

Is Wayfair Stock Overvalued? The Bottom Line

Wayfair is a go-to for home furnishing, operating a group of ecommerce stores that gained in popularity in the face of the coronavirus pandemic.

The company increased sales, but advertising and marketing costs continue to increase, leaving many wondering if it can maintain its current sales.

It also failed to generate a profit for over 20 straight quarters since going public. The company’s customer base is growing, but they’re spending less on each order.

If the company figures out how to tighten operations and keep customers coming without spending so much on marketing, it can be a strong industry leader.

As it stands, Wayfair is at an all-time high valuation, and it’s still not fully profitable. This isn’t a unique situation (think Uber, Tesla, etc), but it puts the company in a tough position it needs to pull out of over the next five years while the economy shrinks. Buy with caution.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.