Why Wayfair stock fell 13.3% this week
Shares of Wayfair (W 4.45%) fell 13.3% this week, according to S&P Global Market Intelligence. The homeware and furniture-focused online retailer did not have any business and earnings updates this week; however, other retailers like Target and walmart commented poorly on the general retail environment, prompting investors to sell Wayfair shares. At one point, Wayfair stock was down 17.2% this week.
Earlier this week, Target and Walmart released their latest results. On its conference call, Target executives said from March that they had seen a huge slowdown in demand for home products as the company exceeded last year’s stimulus payments and consumers had started to spend more on travel items like luggage, which had increased by 50% year over year. . Management also said freight and transportation costs are skyrocketing for its operations, with spending expected to increase by $1 billion in 2022 from what it forecast at the start of the year.
Walmart had a less bearish report, but still said some customers were forgoing discretionary purchases due to high gas and food prices. Combined with the run-in of COVID-19 stimulus checks, that makes sense looking at the 2021 numbers.
This is not good news for a company like Wayfair. It not only operates in a business that is seeing deteriorating demand (homewares and furniture), but operates as an online retailer, meaning it relies heavily on the country’s transportation networks. With shipping costs skyrocketing and demand falling, Wayfair will likely struggle to grow revenue and cash flow in the coming year. In fact, it already showed those struggles last quarter, with revenue down 14% year-over-year and operating cash flow negative $226 million.
Wayfair shares have been hammered over the past year. The stock is down 75% year-to-date and 85% last year as investors lament the company emerging from the COVID-19 period when everyone wanted its products.
It’s also not great that the company can’t seem to turn a profit while its revenue is dwindling. Yes, this is compared to a tough time when the pandemic was in full swing and people were buying a lot of household items, but it’s no surprise that investors are nervous about these developments.
However, if you believe in Wayfair’s business for the long term (meaning it can consistently generate healthy cash flow margins), now might be the time to buy some stock. The stock trades at a discounted enterprise value-to-sales (EV/S) ratio of 0.5, which is well below the market average of around 2.5. This type of valuation can be a setup for potentially high returns for investors buying for the long term.