Wayfair (NYSE: W) is the fastest growing of the Top 10 US online retailers but is it making money.
eMarketer Retail estimates Wayfair’s year-to-year sales were growing at a rate of 40.1% in 3rd Quarter 2018. In contrast, Amazon’s (NASDAQ: AMZN) year-to-year sales were growing at a rate of 29% in 3rd Quarter 2018.
However, Wayfair is the smallest of the Top 10 American E-commerce sites. To clarify, Statista estimates Wayfair had $3.39 billion in sales in 2017. Conversely, Amazon had $52.8 billion in sales in 2017. Thus, Wayfair has lots of room for growth.
So what is Wayfair Anyway?
Value investors will be interested in Wayfair because it is a very obscure company. Unlike the three biggest e-tailers (Amazon, Walmart.com, and Apple) most people have never heard of Wayfair.
Thus Wayfair’s business model is like the department store operator TJX (NYSE: TJX). For instance, TJX operates department and home furnishings stores under several names including Home Goods, Marshalls, and TJMaxx. Notably, TJX is one of the few American department stores that is growing and making money.
How Wayfair (NYSE: W) profits from Women
Like TJX, Wayfair succeeds because it stays below the radar, caters to loyal customers, and offers great bargains. Another similarity is that Wayfair, like TJX, caters to women.
That is a smart strategy because women are the main shoppers for home furnishings. I think this partially explains why the market ignores Wayfair. To explain, most of the commentators and traders in the stock market are men who have little interest in home furnishing.
Moreover, most of the “experts” in e-commerce are men. Hence, Wayfair is cashing in by targeting a neglected segment of the market. In particular, Amazon has only made a big push into home furnishings in recent years.
On the other hand, both Walmart and Amazon have noticed Wayfair’s success. Not surprisingly, both Walmart and Amazon are making big offensives into the home furnishings market. Thus, Wayfair’s current success could be temporary.
Does Wayfair Make Money
I think Wayfair (NYSE: W) has some important value characteristics. Notably, it is obscure and not very glamorous. That means we need to ask the all-important question does Wayfair make money.
Currently, the answer is no but Wayfair has the potential for future profit. For instance, Wayfair recorded a net loss of -$151.73 million and an operating loss of $145.27 million for 3rd Quarter 2018.
On the other hand, Wayfair recorded a gross profit of $392.77 million on revenues of $1.706 billion for 3rd Quarter 2018. Intriguingly, Stockrow estimates Wayfair’s revenues were growing at a rate of 42.35% in 3rd Quarter 2018.
Why Wayfair reminds me of Amazon
Many investors will see a glimpse of Amazon a few years ago in Wayfair. To clarify, Wayfair’s financial numbers look like Amazon’s from four or five years ago.
For example, Amazon recorded a net loss of -$241 million, net profits of $62.752 billion, revenues of $88.898 billion, and a revenue growth rate of 19.52% in 2014. Hence, history is on the side of Wayfair bears.
However, Wayfair lacks many of Amazon’s attributes including Jeff Bezos, and massive investments in infrastructure and technology. Importantly, Wayfair is not investing heavily in digital media or cloud.
How much Cash does Wayfair Have?
In addition, Wayfair’s cash situation is terrible. For instance, Wayfair recorded a negative free cash flow of -$58.7 million and an operating cash flow of $7.8 million on 30 September 2018.
Conversely, Wayfair is making big investments in its company. For example, Wayfair spent $66.61 million on capital expenditures in 3rd Quarter 2018. Moreover, there was a negative cash flow of -$47.43 million.
Thus, Wayfair’s management is reinvesting a lot of money in the company to drive future growth. However, there is little evidence that investment is paying off.
Is Wayfair a Cash Rich Company?
For instance, Wayfair reported having $488.64 million in cash and equivalents and $30.06 million in in short-term investments on 30 September 2018. Thus, Wayfair had access to $518.69 million in cash on that date.
On the other hand, this is a lot of cash for a company with revenues of $1.706 billion. Thus the cash is another similarity with Amazon which is a cash-rich company. Markedly Amazon reported $29.765 billion in cash and short-term investments on 30 September 2018.
The cash is important because Wayfair can use it to finance expansion and technology upgrades. For instance, Wayfair can buy warehouses, robots, delivery trucks, servers, cloud storage and better software to make its platform more efficient.
Can Wayfair compete with Amazon and Walmart?
Two smart investments for Wayfair are robots and warehouse automation. In particular, Wayfair should invest in the robot swarm system the Ocado Group PLC (LON: OCDO) is developing in the United Kingdom.
Robot swarms can help Wayfair make more money by reducing warehouse labor costs while improving speed and efficiency. Wayfair must invest in such technology to keep up with Amazon and Walmart.
Amazon is already deploying vast swarms of robots in its fulfillment centers. Importantly, Quartz reports Amazon is hiring fewer temporary workers for the 2018 holiday season even though its sales volume will presumably be greater. In detail, Amazon hired 120,000 workers for the 2017 holidays but is reportedly hiring just 100,000 temps this year.
How Amazon’s Robots threaten Wayfair
Uniquely, Amazon owns robotics company Kiva Systems. Quartz claims a Kiva robot can reduce the time spent picking, packing, and shipping merchandise from one hour to 15 minutes. Thus the robots make Amazon faster and more efficient.
This threatens because Wayfair because it allows Amazon to offer lower prices on merchandise. Logically, Wayfair will have to deploy its own swarms of robots to compete with Amazon.
A long-term danger at Wayfair is that it will end up paying a lot of its profits to robot suppliers like Ocado or Amazon. Hence, Ocado Group PLC (LON: OCDO) could be a better value investment in e-commerce than Wayfair (NYSE: W).
Is Wayfair a Good Investment?
I conclude Wayfair is not a good investment because it makes no money and pays no investment. For example, Dividend.com offers no dividend data for Wayfair.
Beyond that, I think Mr. Market overpriced Wayfair at $88.16 a share on 21 November 2018. Wayfair is not worth $88.16 because it is not making money and pays no dividend.
Consequently, I advise investors to stay away from Wayfair for now. Instead, if you are seeking a value investment in e-commerce investigate Walmart (NYSE: WMT).
Notably, Walmart is scheduling a 52¢ dividend for 2 January 2019. In addition, Walmart shares were trading for $94.17 on 21 November 2018, so they cost just $6.01 more than Wayfair.
Walmart is an e-commerce play because it is now the third largest U.S. online retailer with 4% of the market and a growth rate of 39.4% eMarketer estimates. Thus Walmart’s growth is nearly as good as Wayfair’s yet it pays a dividend.
As a result, I think Walmart is the best value investment in American commerce today. Wayfair, on the other hand, is a stock to watch not buy.