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HomeMarketWayfair Stock Gets a New Bull. Why It Still Might Not Be...

Wayfair Stock Gets a New Bull. Why It Still Might Not Be Time to Buy.

Wayfair stock has fallen more than 80% this year.

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Gabby Jones/Bloomberg

If retail caught a cold in 2022, it’s fair to say e-commerce came down with the flu. Citigroup argues that the shares of some online merchants have gotten too cheap to ignore, but
Wayfair,
the firm’s top choice, certainly calls for investors to have a strong stomach.

Analyst Ygal Arounian launched coverage on a number of online companies Tuesday, including six e-commerce firms.

“While the macro environment is likely to continue to pressure the consumer which has impacts across our coverage, we see share performance and downward estimate revisions as already reflecting a challenging macro,” he explains. “With multiples still near troughs in many cases we like the risk/reward for our space in 2023.”

It’s no surprise that many of the names are trading cheaply: 2022 has seen the S&P 500 drop 14.7%, but retailers, as measured by the SPDR S&P Retail ETF (ticker: XRT), have tumbled roughly double that, down 29.2%. Meanwhile the
Amplify Online Retail ETF
(IBUY) has lost more than 52% since the start of the year, and the
ProShares Online Retail ETF
(ONLN) has slid 44.6%.

Arounian has Buy ratings on Wayfair (W),
Etsy
(ETSY) and
Bark
(BARK), with price targets of $50, $161, and $2, respectively, which equates to between 20% and 35% upside. By contrast,
ContextLogic
(WISH) is his only bearish call: He thinks the shares could fall to 50 cents.

Wayfair is his top pick for e-commerce, one that he admits is controversial. Not only is the stock off more than 80% in 2022, but even long-term investors have also gotten burned after it gave up all its pandemic gains and then some. Wayfair stock has lost more than 50% of its value over the past five years.

Arounian says the company is “taking the first critical steps towards improving the key drivers of the stock with a $500 million cost reduction plan in place.” In addition, future measures should bring it back to profitability on an earnings before interest, taxes, depreciation, and amortization—or Ebitda—basis, even if the undeniably difficult macroeconomic backdrop doesn’t improve. He says expectations are so low that the company could easily surprise on the upside and lead to positive consensus estimate revisions in 2023.

Certainly no one expects Wayfair or any other retailer to be able to return to the blistering pace of pandemic sales. In the company’s most recent quarter, reported in November, it was able to deliver better-than-expected top-line growth, and gross margins squeezed ahead of its target.

Yet it still feels premature for most investors to jump into the beleaguered stock. Arounian himself notes that that the economic backdrop will remain a key factor for investors.

“Wayfair sits in an industry that is seeing multiple headwinds, including a major pull forward of demand in its category during the pandemic,” Arounian admits. “At the same time, its already-thin margin structure is under more pressure, with Wayfair returning to negative EBITDA and free cash flow margins as its top line has slowed and supply chain challenges have pressured some economics.”

According to FactSet, analysts expect Wayfair to lose money on a per-share basis until 2026, and don’t expect Ebitda to be positive until 2024. In fact, the company has never been profitable by either metric outside of the pandemic years of 2020 and 2021—when everyone was sitting at home ordering furniture. On a GAAP basis, 2020 was the only year it delivered earnings, rather than a loss, per share.

Wayfair could turn in smaller-than-expected losses or return to profitability sooner than expected, as Arounian notes, but to do so it would have to buck history. In the past five years, its bottom line has missed consensus estimates most quarters outside of the pandemic; it hasn’t notched a beat since the third quarter of 2021.

Meanwhile analysts don’t expect the company to surpass its pandemic-era top-line growth until 2025, even as its total debt is expected to remain stubbornly above 2021 levels until 2026.

Without earnings, it has no price-to-earnings ratio, and on a price-to-sales basis, the stock does look cheap, at just 0.3 times. Its five-year average is 1.6 times, although the stock has traded as low as 0.2. Still, it’s hard to see that—or the stock—moving meaningfully higher near term, especially with sentiment running against the sector.

At the least, investors may want to look at less risky ways of betting on Wayfair.

Write to Teresa Rivas at teresa.rivas@barrons.com

Credit: marketwatch.com

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