Wayfair: Earnings Have Peaked, Expect More Downside From Now

11/25/20

By Bears of Wall Street, SeekingAlpha

Summary

  • Wayfair had a stellar performance in the first half of the year, as the company managed to show impressive growth and became profitable.
  • There’s every reason to believe that Wayfair’s earnings for the year peaked.
  • Our DCF model suggests that Wayfair is overvalued.
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Wayfair (W) had a stellar performance in the first half of the year, as the company managed to show impressive growth and became profitable for the first time in its history as a public company. Despite this, there’s every reason to believe that the company’s earnings for the year have peaked and its stock will likely depreciate even more in the following months. Our DCF model suggests that Wayfair is overvalued.

Upside Seems Limited

Wayfair is a popular online platform for home furnishing products. For years, the company has been expanding its catalog of home improvement and furnishing items and its current variety of choice is its major competitive advantage. Thanks to the stay-at-home order, which was imposed earlier this year, Wayfair was able to benefit from the surge in online traffic, as more people started to purchase products on its platform. The company showed a stellar performance in Q1 and Q2 and currently, it owns a sizable market share of the online home furnishing market.

However, our biggest concern about Wayfair is its market price. By trading at a market cap of over $25 billion, the company is significantly overvalued in our opinion. While its stock, along with stocks of other eCommerce companies, managed to show an impressive growth due to the injection of liquidity into the markets by the Federal Reserve earlier this year, there’s a reason to believe that it will significantly depreciate in the following months and the decline has already started.

Before we describe the reasoning behind our thinking, let’s first look at Wayfair’s performance in Q2, which was its best quarter in history. From April to June, Wayfair’s revenues increased by 83.8% Y/Y to $4.3 billion, and at the end of the period, the company had a total of 26 million customers, an increase from 21.1 million at the end of Q1. In addition, its gross margin was 30.7%, above the consensus of 26.1%, while its average order per customer increased from 1.86 to 1.89. During the period Wayfair also managed to make its first profit as a public company, as its non-GAAP EPS was $3.13, above the consensus by $2.08. In Q2 the company has also generated over $1 billion in FCF. Then in Q3, Wayfair’s revenue growth rate slowed down on a quarterly basis and was up 66.2% Y/Y, against a growth of 83.8% Y/Y in Q2. In addition, from July to September, the company made only $173 million in net income against a profit of $273 million in Q2, while at the same time it generated only $255 million in FCF in Q3.

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