Wayfair currently trades at $80.37 per share and has shown little upside over the past six months, posting a small loss of 3.3%. The stock also fell short of the S&P 500’s 4.8% gain during that period.
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Why Is Wayfair Not Exciting?
We're sitting this one out for now. Here are three reasons we avoid W and a stock we'd rather own.
1. Declining Active Customers Reflect Product Weakness
As an online retailer, Wayfair generates revenue growth by expanding its number of users and the average order size in dollars.
Wayfair struggled with new customer acquisition over the last two years as its active customers have declined by 2.3% annually to 21 million in the latest quarter. This performance isn't ideal because internet usage is secular, meaning there are typically unaddressed market opportunities. If Wayfair wants to accelerate growth, it likely needs to enhance the appeal of its current offerings or innovate with new products.
2. Projected Revenue Growth Is Slim
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.
Over the next 12 months, sell-side analysts expect Wayfair’s revenue to rise by 5.3%. Although this projection suggests its newer products and services will catalyze better top-line performance, it is still below the sector average.
3. Low Gross Margin Reveals Weak Structural Profitability
For online retail (separate from online marketplaces) businesses like Wayfair, gross profit tells us how much money the company gets to keep after covering the base cost of its products and services, which typically include the cost of acquiring the products sold, shipping and fulfillment, customer service, and digital infrastructure.
Wayfair’s unit economics are far below other consumer internet companies because it must carry inventories as an online retailer. This means it has relatively higher capital intensity than a pure software business like Meta or Airbnb and signals it operates in a competitive market. As you can see below, it averaged a 30.2% gross margin over the last two years. That means Wayfair paid its providers a lot of money ($69.81 for every $100 in revenue) to run its business.
Final Judgment
Wayfair isn’t a terrible business, but it doesn’t pass our bar. With its shares trailing the market in recent months, the stock trades at 15.5× forward EV/EBITDA (or $80.37 per share). This multiple tells us a lot of good news is priced in - we think there are better opportunities elsewhere. Let us point you toward our favorite semiconductor picks and shovels play.
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