There are no easy answers for Wayfair

In an earnings season that has been mostly positive, a company that misses either in full or in part stands out like the proverbial sore thumb. But putting the clichés aside, the real problem for Wayfair NYSE: W is that they’re not standing out enough. And that could mean that today’s Halloween sell-off may be just the beginning of some turbulent times.

Wayfair stock has erased all of its gains for the year

Wayfair delivered an earnings report in which the company reported a larger-than-expected drop in earnings. The company posted a negative EPS of 2.23%. This number was more than the -1.28% the company posted during the same quarter in 2018. It was also a bigger loss than the -2.10 estimate.

The revenue picture was better. The company reported $2.3 billion in revenue which beat analysts’ estimates of $2.27 billion. The number was also higher on a year-over-year basis ($1.70 billion).

The company’s stock, as recently as October 25, was up 37% for the year. At that level, the stock was outperforming the S&P 500 Index (21%) as well as many of its peers. But that was then.

But for investors, the question is frequently what have you done for me lately? Wayfair stock plunged in pre-market trading and as of the middle of the trading day had not bounced back. This was in contrast to the market’s response after Wayfair’s last earnings report. At that time, the stock went down but then returned to a break-even point during the day.

Analysts are discounting the stock based on tariff uncertainty

Going forward, Wayfair’s guidance for the fourth quarter is not encouraging to analysts. The company is projecting revenue in a range between $2.48 billion and $2.53 billion. That is significantly lower than the consensus estimate for revenue of $2.67 billion. To that end, Colin Sebastian, an analyst for Baird, lowered his price target for the stock to $102 (an almost 33% drop from its previous price target of $150).

“It’s not just China paying for tariffs,” said Sebastian. “As feared, Wayfair’s Q3 report and guidance were negatively impacted by tariffs/higher retail prices.” Sebastian is forecasting the stock to trade in a tight range, despite healthy revenue, until the trade uncertainty goes away.

However, the problem for Wayfair stock may be more complicated than just trading on the news.

The tallest of the seven dwarfs

Wayfair has fared better than many of its peers such as Overstock OTC: OSTBP. But being the best of the rest is not going to be enough for Wayfair. The elephant in the room is Amazon NASDAQ: AMZN. The company is competing in an e-commerce space that continues to be dominated by the retail giant. If the problem were just a question of attracting customers, the company would probably be fine. In its earnings report, the company reported 19.1 million active customers. That number was a 38% YoY increase.

The problem for Wayfair is competing with Amazon means more than competing with them on the price of merchandise. Amazon is changing the narrative of e-commerce from mere convenience to immediacy. We don’t simply want our chintz sofa at a bargain price. We want free shipping. And we want it delivered as fast as possible. The next day will be great, please.

That model is putting more stress on Amazon then they’d like to admit. But the e-commerce giant is expanding into so many other areas, it’s hardly noticeable. But imagine what it’s doing to Wayfair. Free Shipping is a powerful sales incentive. But in the online home furnishings space it’s becoming table stakes.

After its second-quarter earnings report, Wayfair CEO Niraj Shah emphasized that the company was investing in crucial parts of their business, including their logistics network. The hope was that those investments would help it capture, in Shah’s words, an “outsize share” of online furniture shoppers.

Simply put, Wayfair needs to find additional reasons to stand out beyond price. If third-quarter results are any indication, they are still looking to crack that code.