Wayfair Inc. (NYSE:W) is another online retailer still struggling to adapt its business to the normal post-Covid sales model. The online furniture platform saw a massive influx of sales in 2020 as consumers stuck at home needed furniture for home offices and students learning from home. My investment thesis is optimistic that the concept will reach the milestone in 2024, with the very unlikely outcome of a takeover by a Chinese retailer.
Not long ago, Wayfair was an exciting online furniture company with superior supply chain dynamics taking on the e-commerce giant. Amazon (AMZN). The company saw sales surge during the early stages of Covid, with Q2 2020 sales jumping 84% to $4.3 billion, pushing the stock above $300.
The company has struggled for years to stabilize its quarterly sales around only 3 billion dollars, with Q3’23 sales reporting the first year-over-year gain since the first quarter of 2021, at a small 3.7%. Wayfair has finally returned to growth mode, even though the U.S. economy could struggle in 2024, raising questions about the scale and sustainability of e-commerce growth in the coming year.
Analyst consensus estimates don’t predict much growth in the coming years, peaking at 8.6% in 2025. However, the upside potential comes as Wayfair continues to get back on track to capture market share. market amid a growing shift to online commerce. purchases.
What investors do know is that Wayfair has significantly improved its business model during the Covid years. The online furniture company now enjoys better unit profitability, with gross margins of 28.0% in 2022 and reaching 31.1% in the third quarter of 2023.
For the third quarter of 2023, Wayfair actually reported adjusted EBITDA of $100 million and free cash flow of $42 million. Due to the dynamics of the stock market since the peak of Covid, companies have not pushed growth initiatives for the past few years to focus on profitability and long-term stability of the business.
What the market seems to have missed is that Wayfair insisted on returning to double-digit sales growth. The company continues to argue that a total market opportunity would reach $1 trillion in 2030 and suggests that the company has built a platform to grow its revenue from $10 billion to $100 billion.
At Investor Day 2023 in August, Wayfair promoted a return to double-digit growth with at least 5% annual growth driven solely by growth in online categories, as it did before Covid. Adding in market share gains from a massive market, the company projects a sustainable ability to generate at least 10% compound growth.
An improbable Chinese agreement
A report by Information suggests Chinese online retailers like Shein and Temu, owned by Securities in PDD portfolio (PDD), could buy Wayfair for their distribution network. Although the stock only trades at a valuation of $7.5 billion, it is unlikely that a Chinese company would pay a premium of at least $10 billion to buy out its shareholders.
At the end of the third quarter, Wayfair lists property, plant and equipment at just $751 million. The company has 17 distribution centers with 20 million square feet of distribution space, but the company would have to be purchased at a bargain price just to make the assets to make such a purchase work.
The online furniture platform has built the network to deliver large and bulky items at scale and efficiency. Wayfair probably wouldn’t have any interest in being acquired by a Chinese retailer, and Shein or Temu probably wouldn’t have any interest in overpaying for an online furniture company focused on bulk shipping. Additionally, the business transaction would likely be subject to regulatory scrutiny given that it is a Chinese company attempting to acquire a U.S. supply chain and delivery network.
Wayfair is likely rebounding due to a return to sales growth and a cheap valuation. While the company is achieving double-digit growth and heading towards a 10% EBITDA target, the current market cap is very low.
With $15 billion in future sales and a 10% EBITDA margin, Wayfair would generate $1.5 billion in adjusted EBITDA. A simple multiple of 15x adjusted EBITDA gives a market valuation of $22.5 billion. The big question is how long it will take Wayfair to reach these sales levels, given the potential for a weak retail environment in 2024.
The main takeaway for investors is that Wayfair Inc. appears to be on its way back to solid growth, although a weak economy in 2024 could derail that path again. The stock has substantial upside potential once the company is back in growth mode and generating strong adjusted EBITDA margins, making the desire for a deal from a Chinese retailer non-existent.