With millions of people stuck at home for a large portion of this year, we’ve seen some truly awe-inspiring moves in stocks that are involved in the e-commerce industry. These stocks have all been flying due to a permanent shift in the way that people are shopping. It makes sense that e-commerce companies would see an uptick in demand during the pandemic, but some analysts and investors are wondering just how strong some of these companies are. The e-commerce hype has lead to some lofty valuations that could result in significant price drops in the short-term as we’ve seen over the past few trading sessions.
Wayfair (NYSE:W) is the perfect example of an e-commerce company riding positive tailwinds. While it’s a company that has put up some strong earnings numbers this year, several risks should not be ignored. After such an epic run over the last several months, investors that are considering adding shares of Wayfair at this time might want to pump the brakes. While the stock could be a solid long-term investment, there are several things that anyone looking to buy shares of the online home-goods supplier should know about. Let’s take a deeper look at Wayfair stock below and decide whether or not investors should be avoiding it at this time.
Strong Earnings Here To Stay?
One of the big reasons why the online furniture and home goods retailer’s stock has performed so well this year has to do with its strong quarterly earnings. In Q2, the company reported $4.3 billion in Total Net Revenue, which was a year-over-year increase of 83.7%. The company also went from an adjusted EPS loss of $1.35 last year to a surprising $3.13 adjusted EPS in Q2. Wayfair’s active customer base has increased by 46% over the last year and orders delivered in Q2 were 18.9 million, another large year-over-year increase of 106.2%. These numbers are certainly impressive and you might be thinking that Wayfair is a buy after such positive results, but it’s important to dive into the details before making any decisions.
Q2 was one of the strongest for the company in its history, but there’s a chance that the sales and revenue boosts are only temporary. Remember that e-commerce purchases were supported significantly by the massive amount of federal government stimulus sent to U.S. households. At this time, another round of stimulus isn’t looking good while unemployment remains high, which means consumers won’t have that extra money to spend in the coming quarters. You also have to remember that Wayfair benefitted while physical retailers struggled mightily during the first half of the year due to lockdowns, which have since subsided. Home goods, in general, saw a huge bump in demand thanks to stay-at-home orders, but as life returns to normal there’s a good chance people will be spending less on home improvement and more on travel and leisure.
Vulnerable To Competitors
While Wayfair has certainly been a strong stock this year, long-term investors should consider the future of the company over the next few years before buying. Consider whether or not Wayfair has a true competitive advantage and a deep economic moat. The e-commerce company’s customers are loyal, which is a good sign, as repeat customers in Q2 placed 12.7 million orders which resulted in a year-over-year increase of 104.9%. However, one could argue that Wayfair is fairly vulnerable to its competitors.
One of Wayfair’s main differentiators has to do with its product breadth and logistics network, which allows the company to deliver its home goods to customers faster than most of its competitors. The problem is that Wayfair’s competitors are working hard to improve their delivery networks, which could be a big issue for the company. With Amazon (NASDAQ:AMZN) seemingly focused on entering the home goods market too, Wayfair will be challenged to retain its existing customers and have a hard time beating Amazon’s prices.
There’s also the fact that Wayfair competes with very successful mass-market retailers and low-cost providers like Target (NYSE:TGT) and Walmart (NYSE:WMT) without any significant cost advantages. As these companies expand their digital e-commerce footprint, Wayfair could end up losing customers. There also aren’t any costs for consumers when they switch from Wayfair to buying from other home goods companies, which is another downside that investors should consider.
On Watch For Now
With Wayfair, you have a stock that benefitted greatly from the market’s perception of e-commerce during the pandemic. The stock generated incredible returns of over 1000% since hitting March lows and had a very strong second quarter, but investors might be best suited to wait a bit before adding shares. There’s certainly the chance that this company will be a long-term winner, but it’s probably best to be patient even after the big sell-off last week. Let Wayfair’s management team show you that they can continue their growth over the next quarter or two and then revisit the stock later if you are interested in adding shares.