Wayfair In Good Shape But Gains May Be Limited
We like Wayfair (NYSE: W) for a couple of reasons including its pure-play status as an eCommerce retailer, its platform approach to home decor, and its focus on home decor and home improvement. eCommerce is one of the biggest winners from the pandemic and home improvement isn’t far behind. As for the platform approach, the company is aiming to connect all of America’s manufacturers in a single portal making it a very ambitious project indeed. The problem now is the company’s valuation, the broad-market conditions, and the high 19% short-interest that may cap gains in the near term.
Wayfair Exceeds The Markets Expectations
Wayfair had a great Q1 period and one that exceeded the market’s expectations. The company reported $3.48 billion in net revenue or up 49.4% from last year which is fabulous, the problem is the revenue only beat the consensus by about 250 basis points which isn’t really enough to justify the valuation in our opinion.
On a segment basis, the International segment led with 85% growth to top 20% of net revenue. The U.S. segment saw smaller 42.8% YOY growth but comes in at just shy of 80% of the net. Mobile, a key feature of the company’s strategy, jumped 510 basis points to 60% of total order volume.
Moving down the report, the company was able to leverage the sales strength to full effect. Gross profit grew to 28.8% of revenue to produce solid gains on the bottom line and a surprise profit at the GAAP level. On a GAAP basis, which includes investment in future growth, the company produced $0.16 in earnings to reverse a loss in the previous year and beat the consensus by nearly $0.80. On an adjusted basis, the company’s $1.00 in earrings beat by $0.71.
“Wayfair’s focus remains squarely on connecting all of the industry’s customers and suppliers on our unique platform, which is custom-built to address the specific needs of shopping for the home. Our platform model creates a flywheel where scale begets growth, which leads to further efficiency. We see this in action each quarter, and Q1 was no exception,” said Niraj Shah, CEO, co-founder and co-chairman, Wayfair. “We grew to $3.5 billion dollars in net revenue in the quarter, having added more than $1 billion dollars to the top-line year-over-year, and generated over $200 hundred million dollars in adjusted EBITDA -- all while simultaneously and ambitiously investing for the future”
The Technical Outlook: Wayfair Pops On Favorable Outlook
Shares of Wayfair popped more than 6.0% after the Q1 release and may go sharply higher if the short-sellers start covering their positions. The company didn’t give any formal guidance but the commentary was very positive. CEO Niraj Shah predicts both revenue and profitability will improve which we think could spark a short-covering rally if not a short squeeze.
“We are confident that customers will remain focused on their homes even as the environment normalizes in the US and Europe, and that our strong profitability should not only continue but expand.”
The first major hurdle for price action is going to be the short-term 30-day EMA. If the market can get back above that level we see the stock moving up to retest the $350 level if not set new all-time highs. If the EMA can’t be regained then this stock may fall back to $260 or lower under the pressure of bearish activity.
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