Take a Hard Pass on Wayfair Stock, Even After Earnings Beats

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It’s not a good year to be a tech unicorn. The latest example of this has been eCommerce retailer Wayfair (NYSE:W). Wayfair stock has been on fire over the last few years as the firm has been able to successfully compete against the Amazons (NASDAQ:AMZN) and Walmarts (NYSE:WMT) of the world. However, that growth seems to have hit the proverbial “wall.”

Take a Hard Pass on Wayfair Stock, Even after Earnings Beats

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So, far this year, Wayfair stock has continued to plunge and last week, Wayfair lost nearly 18% of its value in one day. The culprit has been a mixture of rising costs and increased competition

But given its declines and history of innovation, some investors may be looking at Wayfair stock from a value perspective. Could the growing eCommerce play offer some real value after losing so much? The answer is not so simple.

The concerns at Wayfair are serious and with overall consumer growth starting to slow, Wayfair may have a hard time clawing back to its former glory days.

The Big Miss and Wayfair Stock

For Wayfair, the story has always been how the home furnishings retailer has been able to compete versus the big boys of eCommerce world. Thanks to its blend of algorithms and tech magic, Wayfair has had a pretty good handle on consumer trends.

Add a dash of door-buster and “cult-following” ingredients and you have a recipe for success. Since its IPO, the company has been able to translate those ingredients into steadily rising revenues.

It’s also allowed Wayfair stock to become a top momentum performer. From its IPO to its peaks hit back in March, W stock managed to surge over 400%. These days, however, the firm isn’t exactly riding the relative strength train. Since hitting those highs, the stock is down about 50%.

The problem isn’t that Wayfair’s revenue growth has slowed. In fact, for its current earnings report, the firm managed to report its sixth consecutive quarter of beating revenue estimates. Sales in the U.S. managed to jump 34%, while international sales grew by 46% over the last few months. That still some very impressive growth.

The issue is that Wayfair seems to be hit by concerns it simply can’t control. And that would be rising costs and competition.

Playing in the eCommerce world is an expensive game these days and Wayfair seems to finally getting hit with the continued need to spend in order to gather those revenues.

For one thing, one-day and two-day shipping is now the norm. Thanks to Amazon’s big push into building warehouses, logistics points and boosting its sipping channels, everyone else is has now been forced to do the same. For Wayfair, that meant seeing a 58.7% jump in spending to boost technology, infrastructure and other expenses related to gathering sales and getting them to consumers fast.

At the same time, as AMZN, Walmart and Target (NYSE:TGT) continue to pull in more the eCommerce pie, Wayfair has been forced to spend more to even get noticed. Advertising costs jumped 12% of sales this quarter. That’s about double what management would consider sustainable for the long haul.

And we can’t forget about the effect of tariffs on Wayfair’s bottom line. According to its own calculations, more than 90% of its products are subjected to the trade war and current/future rounds of tariffs. That’s resulted in higher prices on its site and increased costs for W. It turns out, consumers are starting to balk with longer “consideration cycles” for purchases.

All of this has only made margins at Wayfair fall further and produce bigger losses. In fact, here in the U.S. margins are a fat negative 3% for W.

The Problems Aren’t Going Away for Wayfair

Yeah, you got to spend money to grow, but the difficulty for Wayfair stock and its investors is that these various issues aren’t going away. In fact, they are only getting worse. Amazon continues to spend big in both opening new warehouses and physical storefronts, while TGT and WMT begin to use their already existing footprints as launch points for shipping.

Moreover, all three of those major players have aggressively moved into home furnishings through private label brands and development deals. These generally lower-price-point items, flat-pack furniture and accessories are right in Wayfair’s sandbox. This amps the competition factor even higher and should force the company to spend even more in order to gather sales.

And let’s face facts, despite the Phase One “deal,” the trade war doesn’t look likes it going to end anytime soon. In fact, Wayfair CEO Niraj Shah admits that the price volatility will last for the next several months. Adding this into the recent slowdowns in consumer confidence and consumer spending, Wayfair is quickly finding itself between a rock and a hard place.

Take a Hard Pass on Wayfair Stock

The latest quarter for Wayfair underscores the cutthroat world of eCommerce. Costs across the board continue to rise. For smaller players like W, that’s a huge albatross around their necks.

For investors, W stock may have some value, but not today. The brand is worth something and it does continue to see more sales. However, the reality is, the stock has more losses ahead as the continued tough environment plays out.

It’s just spending too much to get those sales and with profitability being pushed further out into the future, there’s only so long investors can wait.

My advice would be to take a hard pass on Wayfair stock and buy any of the other eCommerce plays- TGT, WMT or AMZN- instead. At least you get profitability, real cash flows and dividends.

Disclosure: At the time of writing, Aaron Levitt was long shares of AMZN.

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