A massive winner during the first post-pandemic surge, furniture-focused e-commerce firm Wayfair (NYSE:W) is back for an encore performance, more than doubling so far this year. However, with consumers getting pushed to the max, the home goods specialist may incur high risks. Therefore, I am bearish on W stock.
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W Stock Initially Appears to be a Strong Investment
Generally, investors should steer clear of glaringly contrarian ideas. In the case of W stock, it gained over 120% since the January opener. Proving that the sentiment lift is no fluke, Wayfair shares returned nearly 54% to stakeholders over the past 365 days. As well, fundamental evidence points to the e-commerce firm being a strong market idea.
Most notably, Wayfair beat top-and-bottom-line expectations for its second-quarter earnings report. According to TipRanks reporter Kailas Salunkhe, Wayfair rang up sales of $3.17 billion. Although this tally represented a 3.4% decline on a year-over-year basis, it beat Wall Street’s target by $70 million.
On the bottom line, the company delivered earnings per share of 21 cents. This figure resoundingly beat the consensus estimate by 94 cents. Notably, helping boost profitability was the number of orders placed by repeat customers, which increased by 6.4% against the year-ago quarter to 8.3 million.
Impressively, wrote Salunkhe, “The company has achieved positive year-over-year order growth, positive adjusted EBITDA, and positive free cash flow in the second quarter.” Subsequently, investors cheered the performance, sending W stock up by a double-digit percentage.
Moreover, while recession fears cloud the broader narrative, TipRanks contributor Joey Frenette pointed out that analysts remain enthused about high-quality consumer discretionary enterprises. Also, Frenette makes the argument that even under the worst-case scenario of a recession, the subsequent headwind might not weigh down all retail plays evenly.
That’s a fair point, and W stock could be an exception. After all, it’s already performed so spectacularly. Still, the finer print leaves some doubts to be addressed.
Consumers May be Stretched to the Limit
Looking at TipRanks’ technical analysis assessment, the consensus over a one-day period stands at “strong buy.” Over the one-week period, the consensus comes down slightly to “buy.” Against the one-month timeframe, the consensus sits at “neutral.” What might be causing this deterioration in sentiment could be the consumer base. Simply, it’s probably stretched to the absolute limit.
Recently, business media was abuzz when news broke that American credit card holders collectively racked up over $1 trillion in debt. Some experts might interpret this development as a sign of consumer strength. In one sense, it’s possible to make the argument that people felt confident enough to stack plastic debt that high.
However, should things go wrong, U.S. households would enter a recession in a weakened financial state. Logically, such a framework wouldn’t be helpful for W stock. Indeed, what makes the matter worse is that even Wayfair’s earnings print signaled rising concerns.
Yes, the company’s revenue per active customer increased. However, management also disclosed that the number of active customers declined by 7.6% from one year ago to 21.8 million, and this deterioration aligns with concerns among major retailers that the spending surge won’t last.
On top of this dilemma, housing rentals have skyrocketed since prior to the COVID-19 pandemic, while many would-be homebuyers have been forced out of the market, adding even more upward pressure on the rental sector. In totality, these conditions leave little room for discretionary retail spending.
It’s no laughing matter. Recently, The New York Times reported that many young Americans can’t comfortably afford their rental payments. Again, the consumer base is arguably stretched too far.
What is the Fair Value of Wayfair Stock?
Turning to Wall Street, W stock has a Moderate Buy consensus rating based on 15 Buys, eight Holds, and two Sell ratings. The average W stock price target is $93.00, implying 24.3% upside potential.
The Takeaway: W Stock Had a Great Run, but It Could End
To be sure, Wayfair deserves praise for finding mechanisms to attract customers under difficult circumstances. As well, the company’s repeat customers appreciate the e-commerce firm’s offerings. Unfortunately, evidence shows that the lights are beginning to dim on the broader consumer economy. Even the mighty Wayfair is demonstrating signs of stress, meaning W stock could be due for a correction.
