Predicting the trajectory of Wayfair's stock over the next year is a challenging task due to various market factors.
Wayfair (W) (-1.82%) celebrated its 10th anniversary of its Oct. 2014 IPO at $29 per share recently. Despite the celebration, shareholders of the online retail giant have been left bitter as the stock's current $40 price represents an 89% drop from its all-time high of $369 reached in early 2021. Lower sales and substantial financial losses have been common themes in recent years.
The dreary figures don't instill much confidence, but the potential for the company to make a comeback could transform the stock into a significant winner once again.
Let's examine where Wayfair shares might be in a year.
Challenging market conditions
Wayfair experienced significant growth during the peak of the COVID-19 pandemic, but managing shifting economic conditions more recently has proven to be challenging.
Sales continue to decline as consumers limit large household item purchases due to high prices and increased borrowing costs. Additionally, Wayfair's market category faces distinct challenges related to the logistical constraints of shipping bulky and heavy items. In addition, inflationary pressures on labor and transportation costs have kept margins low and profitability out of reach.
Total revenue of $11.8 billion in the previous 12 months is down from the peak of $14.4 billion in early 2021 and explains the poor stock performance over the past few years.
A potential silver lining in 2025
Wayfair's weakness is apparent in its third-quarter earnings report, as net revenue decreased by 2% compared to the previous year. The company experienced a 6% decline in total deliveries of orders, partially offset by a 4% increase in average order value.
Despite the underwhelming headline numbers, management's efforts to control fixed costs provide some optimism that Wayfair's financial position has stabilized. The most notable metric is Selling, Operations, Technology, General, and Administrative (SOTG&A) expenses as a percentage of revenue, which decreased from 20% to 17% compared to the previous year. This resulted in adjusted EBITDA improving to $119 million compared to $100 million in the prior-year quarter.
What Wayfair lacks is stronger sales momentum. The silver lining is that with a lower cost structure, the company is well-positioned for a significant earnings increase when demand eventually picks up.
Wayfair co-founder and CEO Niraj Shah expressed optimism about the company's long-term potential during the third-quarter earnings call. Shah said:
We're not running the business with the expectation of a recovery in any specific timeframe. For over two years, we've been doing two things simultaneously - driving cost efficiency and spending discipline to operate the business profitably in a recessionary environment and setting ourselves up to be a significant beneficiary when the category returns to growth.
Whether a sales recovery for Wayfair materializes in 2025 or later, the company's loyal base of 22 million active customers and positive free cash flow over the past year grants it some breathers as it awaits that turnaround. Despite a high debt balance sheet position, it remains manageable in the near term.
The pathway to stronger growth may begin with signs of a housing market recovery. Historically, there has been a connection between housing indicators like new and existing home sales, as people who are moving frequently make home furnishing purchases. From its current historically low activity level, Federal Reserve interest rate cuts could serve as a catalyst for the housing market, the home improvement industry, and Wayfair.
My Wayfair stock prediction
Recognizing the ongoing uncertainty, I remain cautiously optimistic about Wayfair and believe the stock price will be higher than it is now by this time next year.
This prediction hinges on several favorable circumstances, but with Wayfair trading at just 0.4 times its annual revenue, the stock appears to be a bargain. The headwinds the company faces are already factored into its shares, making a small investment through a dollar-cost-averaging strategy a viable option for investors with a long-term perspective and a diversified portfolio to mitigate volatility risks.
Despite the current challenges in the market, investors might consider allocating funds to Wayfair with the hope of capitalizing on its potential turnaround. With the company's reduced costs and optimistic outlook, it could witness a significant earnings increase when demand picks up.
Understanding the potential role of a housing market recovery in driving growth, investors may view Wayfair's current stock price as an attractive bargain, offering a chance to invest at a low multiple of its annual revenue.
