Wayfair, A $14 Billion Company With Negative Book Value.
E-commerce has been a booming business sector that has seen stocks within the sector rise 50%, 100%, 200%+ percent or more over the course of a year or in many cases, just a matter of months. From financial analysis perspective, E-commerce is a very interesting business sector. With just a little digging, we find a significant amount of company’s with large amounts of toxic financing, high amounts of leveraged and all the while generating millions in revenue and at the same time increasing losses. Regardless, we find that these publicly traded companies are trading at massive valuations because investors are concerned with one metric- revenue growth. Today I want to talk about one of the biggest beneficiaries of this love affair with revenue growth, WAYFAIR.
WAYFAIR is an American e-commerce company that sells home goods. It offers more than 10 million products for housewares, seasonal décor, decorative accents and home furnishing. WAYFAIR has been one of the hottest stocks over the last 3 years as it has generated a return over 211% since May of 2017. This rise in price has dangerously placed WAYFAIR in an overvalued territory and I’m going to explain why. Many bear bias analyst believe that WAYFAIR is the most overvalued company trading on any market right now and I agree with them. But why? Using WAYFAIR’s own Income Statement and Balance sheet, it’s clear to see the company’s losses under operating expenses are accelerating at an extremely dangerous rate.
The hype from the deterioration of traditional commerce to the emergence e-commerce becoming our new way to acquire the things we want, have blinded investors to see that WAYFAIR is now longer the smart investment grade, fair valuation value play that it was from 2015 to the beginning of 2017. Using the WAYFAIR Income Statement and Balance sheet in Q4 2014, WAYFAIR generated $408.6 million in operating revenue and in four years’ this has accelerated to over $1.9 billion. Traders world wide have ignored the fact that during these gains the company has failed to develop positive book value. Book Value of the company is All its Assets minus All its Liabilities. When Liabilities of a Company exceed its Assets, then the Book Value becomes negative. Meaning all its Equity is gone. And if company does not arrange for new financing, it will go insolvent. According to Enomoto (2019) during WAYFAIR sub- $1 billion sales quarters, the Year-over-year growth rate of WAYFAIR stock has averaged 26 per cent while during the plus-billion quarters its metric skyrocketed to 73 per cent. This essentially means that investors are consistently paying higher prices for less valuable stock.
The current price of the company is not justified by its profit projections or its PE (price-earnings ratio). According to Macrotrends as of June 11th 2019, the PE ratio of WAYFAIR is 0.00 (WAYFAIR PE Ratio 2013-2019 | W., n.d.). This means that the earnings of WAYFAIR are negative which means the company is making losses. This is proved by the accelerating consolidated Net income losses which as of 2018-12-31 stood at $-504 million. The diluted Earnings per share as reported this date is also negative -5.63 (Staff, 2019).
I believe that we are one or two reports away from a report that could generate an instant loss from 20 to 40% and lead to a slide similar to stocks like Grubhub, which at one point was a market darling of its own. WAYFAIR overvaluation results from gut-driven, illogical decision making and emotional trading that is artificially inflating stocks in the ecommerce space. Losing money is the name of the game at WAYFAIR . They’re so good at it that when the company’s management in November 2018 announced that the company could face holiday profitability pressures, the company slashed prices so thin that many believe they sold products at a loss for the holidays. But like time and time again, investors ignored common sense and on the Q1 earnings report, a massive but unprofitable revenue sent the stock spiking from $79 on December 24, 2018 to $170 in March of 2019. Despite significant negative indicators, investors are failing to head the clear and present warning signs in regard to WAYFAIR and its virtually possible path to profitability.
WAYFAIR has both a combination of weak technical and fundamental indicators and its overvaluation is due to nothing but overwhelming investor optimism. I suspect that at least in the short to mid term that longs will continue to win here but the real opportunity now at these levels is all on the downside of the trade. As of 6/19/2019, insiders are dumping the stock by the boat loads.
Enomoto, J. (2019, March 04). A Correction Is on the Way, so Lock in Your Wayfair Stock Profits. Retrieved June 12, 2019, from https://finance.yahoo.com/news/correction-way-lock-wayfair-stock-153825830.html
Staff, M. (2019, June 12). NYSE: W – Income Statement & Balance Sheet for Wayfair. Retrieved June 12, 2019, from https://www.marketbeat.com/stocks/NYSE/W/financials/
Wayfair PE Ratio 2013-2019 | W. (n.d.). Retrieved from https://www.macrotrends.net/stocks/charts/W/wayfair/pe-ratio