Betting on a recovery, investors have sent higher Wayfair (NYSE:W) Inventory has increased by 75% over the past year. Most of that increase came in 2023, but the stock has held steady so far this year as investors await the online furniture seller’s next update.
Wayfair shares are still 82% off their highs and still trading at a ridiculous 0.6 times trailing 12-month sales. But 53% of 38 Wall Street analysts rate it as a buy as of this writing, and the other 47% call it a “hold” – none of them call it a “sell.” The median price target is a 13% upside from today’s price, and one analyst expects it to rise 62% over the next 12 to 18 months.
So should you turn to Wall Street and buy Wayfair shares?
What’s wrong with Wayfair?
Wayfair sells furniture through multiple websites that target different price points, from mass-produced furniture to luxury furniture. It has also evolved into a third-party platform, similar to Amazon, which is an easy pivot as it works with a drop ship model. This means no inventory is kept; It works with a huge base of suppliers who showcase their products on Wayfair’s websites, and Wayfair handles the ordering and fulfillment.
In theory, this should be a high-margin business because it carries no inventory and incurs no costs for the goods sold. But that’s not what happened. Wayfair’s sales surged at the start of the pandemic as shoppers were stuck indoors and spending money on home improvements. But like many other victims of its own success, Wayfair invested in meeting high demand, and when demand collapsed, sales fell and Wayfair was left with a lot of costs.
Wayfair has done the hard work of reducing these expenses to achieve higher sales growth. After nine consecutive and miserable quarters of sales declines, Wayfair reported its second consecutive quarterly sales growth with a tiny 0.4% increase in sales in the fourth quarter of 2023. The number of active customers increased 1.4% in the quarter and orders per customer increased slightly from 1.81 to 1.84.
The profitability ratios are improving. Gross margin was 30.3% in the quarter, up from 28.8% in 2022, and adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) was $92 million, reflecting a loss of $71 million in the quarter previous year was balanced. Net loss narrowed to $174 million from $351 million in the year-ago period and was the third consecutive quarter of positive adjusted EBITDA and positive free cash flow.
Wayfair has a chance this year
Admittedly, the working atmosphere at Wayfair is not particularly good at the moment. Investors hoping for interest rate cuts suffered another blow last week with recent reports of high inflation. This steers buyers away from big, expensive products like furniture and home renovations.
According to Wayfair, the entire home furnishings category has struggled over the past nine quarters, with double-digit percentage declines in the past six. Wayfair’s net sales per active customer fell 4% year-over-year in the fourth quarter, and average order value fell to $276 from $283 in the fourth quarter of 2022.
For the first quarter of 2024, management said in its March quarterly report that these key metrics would decline again. Gross margin is expected to remain stable at 30% to 31%, and the company is targeting “significant” adjusted EBITDA growth for the year.
CEO Niraj Shah repeatedly said on the fourth-quarter earnings call that Wayfair is focused on what it can control. It cannot control the furniture market, which is expected to remain bleak with persistent inflation, high interest rates and a dismal real estate market. It is unlikely that the entire industry’s sales will increase so quickly.
Wayfair can focus on becoming more efficient and preparing for a recovery. It has cut the number of employees several times and reorganized its business from the ground up.
There’s a lot of risk here. In the past, Wayfair has been unable to scale without losing money and becoming an unnecessarily bloated organization. Long-term investors need to have confidence that Wayfair will do the right thing if given another opportunity.
It may be too early for most investors to take a risk on Wayfair stock. However, if you are a risk-taker, you may want to take a small position and benefit from a recovery.
Should you invest $1,000 in Wayfair now?
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Jennifer Saibil has no position in any of the stocks mentioned. The Motley Fool has positions on Amazon and recommends them. The Motley Fool recommends Wayfair. The Motley Fool has a disclosure policy.
Half of Wall Street covering analysts now call this beaten-down stock a buy, and one sees a 60% upside. Originally published by The Motley Fool