Is Wayfair Still Way Cheap For Investors?

Key Points

• Wayfair is rocketing higher on a reversal in analysts' sentiment. 
• The short interest is helping so expect to see volatility. 
• The long-term outlook is good but near-term headwinds remain. 

Wayfair NYSE: W stock has been getting a lot of attention from analysts, and that action has the stock rocketing higher but it still looks cheap. The analyst's activity includes 3 major upgrades on top of a string of upgrades and price target increases that have the sentiment moving higher and the Marketbeat.com consensus price target firming after a prolonged period of decline.

The takeaway is that bearish analysts are turning to bulls as a group and that has the near-term outlook very favorable indeed. JPMorgan, Bank of America and Wedbush all upgraded the stock to Outperform, and two of those were double-upgrades. Their consensus is that the stock trading in the mid-$60s is about 11% above the recent price action. 

The reason for the turn-around is simple. The company’s business is showing some signs of improvement, and execs have leaned into cost-saving measures. The latest word is Wayfair will lay off another 1000 employees of about 5% of its workforce and will reach break-even EBITDA earlier in 2023 than previously forecast.

This has the analysts speculating that real profits will soon follow, but there is risk in that outlook. Q4 sales are expected to be sequentially higher, and management confirmed December sales were in-line with that outlook, but that doesn’t mean sales will remain strong in calendar Q1 and F2023. The latest retail sales figures are not inspiring.

"Additionally, over the next 3-5 years, W should outgrow the category given the longer-term shift towards online retailing and its advantaged assortment/supply chain as the largest scaled online specialty player in the industry,” said JPMorgan Chase analyst Christopher Horvers. 

Investors Should Expect Volatility In Wayfair 

Shares of Wayfair are up a strong 100% since the end of 2022, and they may move higher. The caveat is that price action is driven by the 32% short interest as much as by bullish behavior. The turnaround in sentiment is great news but not the catalyst to drive a sustained 25% day-to-day rally without the aid of some other force.

This means investors should expect daily volatility even if the stock sustains its upward movement. It is unlikely there are enough buyers to sustain prices at this level, and the short-sellers may pile back in at a higher price point. 

Wayfair is expected to report earnings in late February. The analysts' estimates may trend higher over the next few weeks but are looking for a 6.5% decline in YOY revenue which is not good. The margin is expected to also contract and drive a wider loss, but there could be positive surprises in the news.

While results will be important, the outlook for Q1 and 1st half results will be what drives the market and specifically the outlook for break-even results. Without another positive catalyst, this market could easily hit resistance and continue to wallow at the current lows for some time. 

The Technical Outlook: Look At Wayfair On The Weekly Chart 

The daily price action in Wayfair looks great, but the weekly charts are still a big worry. The takeaway is that the shift in analyst sentiment was a signal to manage short positions more than one to buy into the market. Wayfair may have hit bottom, but if it is the “the” bottom or “a” bottom is yet to be determined. At best, Wayfair is now range bound at post-COVID lows and, at worst will trend lower when the results and outlook fail to impress.

In between then and now, looking at this with the February earnings release as the most likely catalyst, Wayfair stock could see some violent swings in its price. If the company produces a good report and outlook, this market could reverse, but that is a big if.