Wayfair(NYSE: W) recently marked the 10th anniversary of its Oct. 2014 initial public offering at $29 per share. Unfortunately for shareholders of the e-commerce giant, the milestone is a bitter one. At the time of this writing, the stock's $40 price marks an 89% decline from the all-time high of $369 it reached in early 2021. Lower sales and large financial losses have been a recurring theme in recent years.
The headline numbers don't inspire much confidence, but the possibility the company can turn things around could make the stock a big winner once again.
Let's see where Wayfair shares might be in one year.
A difficult industry environment
Wayfair saw record growth during the height of the COVID-19 pandemic, but it has struggled to manage shifting macroeconomic conditions more recently.
Sales continue to fall as consumers limit large purchases of home goods and furniture amid high prices and elevated borrowing costs. Wayfair's market category also poses unique challenges considering the logistical constraints of shipping the sometimes bulky and overweight items. Inflationary pressures on labor and transportation costs have kept margins low and profitability elusive.
Total revenue of $11.8 billion in the trailing 12 months is down from the peak of $14.4 billion in early 2021 and helps explain the disastrous stock price performance over the past several years..
Data by YCharts.
A possible silver lining in 2025
The ongoing weakness is evident in Wayfair's third-quarter earnings report as net revenue fell 2% year over year. The company saw a 6% decline in total orders delivered, partially offset by a 4% increase in the average order value.
On the other hand, even through the tepid headline numbers, efforts by management to control fixed costs offer some signs of encouragement that Wayfair's financial position has stabilized.
The metric that stands out is selling, operations, technology, general, and administrative (SOTG&A) expenses as a percentage of revenue, which shrank from 20% to 17% year over year. That result was good enough for adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) to improve to $119 million compared to $100 million in the prior-year quarter.
What Wayfair is missing right now is some stronger top-line sales momentum. The silver lining is that with a lower cost structure, the company is well positioned for when demand does pick up to drive earnings significantly higher.
Image source: Getty Images.
Comments by Wayfair co-founder and CEO Niraj Shah have projected optimism about the company's long-term potential. In the third-quarter earnings call, Shah said:
We are not running the business with the expectation of a recovery in any specific timeframe. For more than two years, we've done two things simultaneously, driving cost efficiency and spending discipline to run the business profitably in a recessionary environment and setting ourselves up to be a considerable beneficiary when the category does return to growth.
Whether a sales rebound for Wayfair emerges in 2025 or later, a loyal cohort of 22 million active customers and positive free cash flow over the past year buys the company some time for that turnaround to play out. A high balance sheet debt position remains a concern but is otherwise sustainable in the near term.
The first step toward stronger growth likely starts with signs of a recovery in the housing market. Traditionally, there is a connection with indicators like the number of new and existing home sales, as people who are moving often spend on furnishings. From the current historically low level of activity, Federal Reserve interest rate cuts could represent a tailwind for the housing market, the home improvement industry, and Wayfair.
My Wayfair stock prediction
Recognizing the ongoing uncertainty, I'm cautiously bullish on Wayfair and believe the stock price will be higher by this time next year.
That prediction relies on several things going right, but with Wayfair trading at just 0.4 times its annual revenue, the stock looks like a bargain. The headwinds the company faces are already priced into its shares, so for investors with a long time horizon, a small position built through a dollar-cost-averaging strategy to mitigate volatility risk can work within a diversified portfolio.
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Dan Victor has no position in any of the stocks mentioned. The Motley Fool recommends Wayfair. The Motley Fool has a disclosure policy.
