There are some good reasons to be optimistic about Wayfair (NYSE: W) over the long term. It commands a strong market position in the digital selling channel for home furnishings, which is projected to expand as an industry for many years. The move could be similar to how consumer electronics sales shifted away from brick-and-mortar retail in the past decade, lifting sales and earnings for leading companies in that niche like Amazon.

But Wayfair has some big challenges to face in the meantime. Sales haven’t risen in years, and profitability seems far off. Against that backdrop, let’s look at where the stock might be headed in the medium term.

The promising outlook

Despite the recent growth hangover, the prospects are bright for the home furnishings category that is Wayfair’s core business. It is expected grow to roughly $1 trillion by 2030 compared to about $800 billion today.

Wayfair has a good chance at capturing much of those gains, too, as spending on home furnishings and home upgrades shifts toward online selling channels.

Shoppers spend about $500 per year on Wayfair orders, for example, while they spend over $3,000 on home products overall. Management likes to point out that the market is fragmented, too, providing an opportunity to consolidate market share gains over the next decade even as the company expands internationally. Wins along these lines could allow Wayfair stock to significantly outpace the wider market over the next several years, just as it has so far in 2023.

The risks ahead

Yet there are several big risks to that optimistic outlook. For example, Wayfair is currently posting weak results, in engagement and profitability. Its customer base shrank at a double-digit rate last quarter, and the current $12 billion annual sales level is well below what the company achieved in 2021. Most Wall Street pros are predicting a third consecutive year of falling sales in 2023.

W Operating Margin (TTM) data by YCharts. TTM = trailing 12 months.

Earnings trends are even worse. After briefly touching positive territory during the high-growth days in the pandemic, operating profit margin has turned sharply negative. Management is aiming to achieve positive earnings on an adjusted basis by the second half of 2023, but it could be several more quarters until net income is reliably positive.

Watch the stock for now

These trends suggest that investors might be getting ahead of themselves by sending the stock so much higher through the first half of 2023. While the falling likelihood of a recession is good news for this business, Wayfair is still far from generating the type of steady sales and earnings growth that can power excellent returns for shareholders over several years.

As a result, most investors will want to simply watch this stock for now, as it could easily underperform the market if its momentum doesn’t improve.

A return to steady customer growth would be a positive sign about Wayfair’s recovery, and so would solid annual earnings. Watch for these factors to show up before making a big commitment to the stock right 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. Demitri Kalogeropoulos has positions in The Motley Fool has positions in and recommends The Motley Fool recommends Wayfair. The Motley Fool has a disclosure policy.

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