Wayfair (NYSE: W) Surges Another 10%: Does it Have More Room to Run?

Wayfair NYSE: W, an e-commerce company that sells furniture and home-goods, was struggling even before the pandemic caused markets to tank in mid-February. Over the preceding seven months, W had lost more than one-third of its value.

Things got even worse for Wayfair in mid-February, as shares plunged 75% more in just one month. Business looked bleak as Wayfair laid off hundreds of workers in February and expected Q1 revenue growth to slow to 15% to 17%, a low number for such a richly valued company.

But since putting in its March 19^th low at $21.70, Wayfair has skyrocketed. After Wednesday’s increase of more than 10%, the stock is nearly $220 a share, up a staggering 10x off the lows of just three-and-a-half months ago.

As you may have guessed, Wayfair has been a huge (and unexpected) beneficiary of the “new-normal” environment.

So what has allowed Wayfair to prosper? And are shares still a good value at these levels?

An Ideal Business Environment

Wayfair’s Q1 2020 revenue ended up growing 20% yoy, with U.S. up 19% and international up 24%.

Business improved as the coronavirus took hold of the world.

During the Q1 earnings call, CEO Niraj Shah said, “Starting in mid-March, we saw a pickup in both traffic and conversion, with increasingly strong repeat behavior coupled with an acceleration in new customer orders. This period coincided with customers beginning to shelter in place at home, which led to new needs for essential products like cookware and kitchen appliances, home office products and children's furniture and play items, and also brought to light ongoing renovation and decoration projects that customers are now taking on.”

The company has built on its late Q1 momentum going into Q2. Wayfair says that Q2 revenue is tracking at an increase of 90% yoy.

Wayfair is essentially a pure e-commerce company, with just two physical stores. It saw a few direct benefits from onset of the pandemic:

• Customers are increasingly shopping online. This brings people to Wayfair and away from competitors like Bed Bath & Beyond NASDAQ: BBBY and Macy’s NYSE: M that don’t have as strong of an online presence.
• A lot of people are stuck at home right now which has led to higher demand for furniture and home-goods. The work-from-home boom is a godsend for Wayfair.
• Advertising costs are lower due to COVID, allowing a thriving company like Wayfair to swoop in and take even more market share from wounded rivals.

On that last point, Wayfair’s marketing strategy is unaffected by the pandemic. Around 75% of its marketing is done through digital channels, 15% is on television, and 10% is through direct mail. Repeat customers account for around 70% of Wayfair’s orders; the company effectively engages with these customers through email and app notifications.

The recent second wave of the pandemic indicates that the virus could be a factor for many months to come, setting Wayfair up for continued strength.

But obviously the pandemic will eventually end. How will Wayfair perform when that happens?

Long-Term Outlook

As stated earlier, Wayfair gets around 70% of its orders from repeat customers. That bodes well post-pandemic, as it shows the company has strong customer satisfaction and loyalty.

And while people will eventually return to the office en masse, it appears that working from home will be more prevalent in years to come. A lot of people enjoy working from home, companies can save money on office rent, and the technology now exists to support it.

All that said, Wayfair stock is expensive after this huge run. It’s trading at just under 2x sales. And it’s still not turning a profit. The lack of profitability isn’t a dealbreaker as revenue growth is most important at this stage, but it remains to be seen if Wayfair can get earnings high enough to justify its current prices.

Wayfair does have a lot of room for expansion though. It is the top company in the furniture and home-goods e-commerce space with $9.1 billion in revenue in 2019. Home furnishings stores accounted for nearly $120 billion in sales last year, and Wayfair has additional upside internationally.

Technicals

Wayfair shares are certainly extended at these levels. While the stock has consolidated over the past two months, basing between $156 and $221, it’s tough to buy a stock that has had such a massive recent run-up.

Shares now sit just shy of the all-time highs made a couple of weeks ago. Wayfair would be tempting on a potential high-volume breakout, but I think it’s too risky here.

The Verdict

It’s tempting to get into Wayfair at these levels and hope that it can continue its surge. But an unclear path to growing into its current valuation and extended price action makes it a no-go at this time.

That said, Wayfair’s business has a great long-term upside. This is definitely a company to keep an eye on over the next several months. If the market takes another tumble, you might be able to pick up some shares at an attractive price.