Half of Wall Street Covering Analysts Are Calling This Beaten-Down Stock a Buy Right Now, and 1 Sees a 60% Upside

There might be a rebound happening even now.

Betting on a recovery, investors have sent up Wayfair (W -3.84%) stock 75% over the past year. Most of that gain came during 2023, but the stock has held steady so far this year as investors wait to hear the next update from the online furniture seller.

Wayfair stock is still down 82% from its highs, and it’s still trading at a dirt cheap valuation of 0.6 times trailing-12-month sales. But 53% of 38 covering Wall Street analysts are saying to buy it right now, and the other 47% are calling it a hold — not one of them is calling it a sell. The median price target is a 13% increase from today’s price, and one analyst sees it gaining 62% over the next 12 to 18 months.

So should you go with Wall Street and buy Wayfair stock?

What’s wrong with Wayfair?

Wayfair sells furniture through several websites that target different price points, from mass to luxury. It has also branched into being a third-party platform similar to Amazon, which is an easy pivot since it works with a drop-ship model. That means that it doesn’t keep inventory; it works with a huge supplier base that features its products on Wayfair’s sites, and Wayfair takes care of ordering and processing.

Theoretically, this should be a high-margin business, since it doesn’t carry the inventory and there’s no cost of goods sold. But that’s not what’s been playing out. Wayfair’s sales skyrocketed early in the pandemic when shoppers were stuck inside, and they spent money on home improvement. But like many other victims of their own success, Wayfair invested in meeting high demand, and when demand plummeted, sales fell, and Wayfair was left with a load of expenses.

Wayfair has been doing the hard work of offloading those expenses as it seeks to regenerate higher sales growth. After nine consecutive and miserable quarters of sales declines, Wayfair reported its second consecutive quarterly revenue growth with a tiny 0.4% increase in sales in the 2023 fourth quarter. Active customers increased 1.4% in the quarter, and orders per customers increased slightly from 1.81 to 1.84.

Profitability metrics are improving. Gross margin was 30.3% in the quarter, up from 28.8% in 2022, and adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) was $92 million, reversing a $71 million loss the year before. Net loss narrowed from $351 million in the year-earlier period to $174 million, and it was the third consecutive quarter of positive adjusted EBITDA and positive free cash flow.

Wayfair has a chance this year

Admittedly, Wayfair isn’t in a great operating climate right now. Investors hoping for cuts in interest rates were dealt another blow last week with the latest reports showing high inflation. That’s going to keep shoppers away from large, expensive products like furniture and home renovations.

Wayfair says that the entire home furnishings category has struggled for the past nine quarters, with the past six seeing double-digit percentage declines. Wayfair’s net revenue per active customer decreased 4% year over year in the fourth quarter, and average order value decreased to $276 from $283 in the 2022 fourth quarter.

For the 2024 first quarter, management said in its March quarterly report that those key metrics would be trending down again. Gross margin is expected to hold steady at 30% to 31%, and it’s committed to “substantial” growth in adjusted EBITDA for the year.

CEO Niraj Shah said repeatedly on the fourth-quarter conference call that Wayfair is focusing on what it can control. It can’t control the furniture market, which is expected to stay bleak, with persistent inflation, high interest rates, and a dismal housing market. Revenue isn’t likely to jump any time soon for the industry as a whole.

What Wayfair can do is focus on becoming more efficient and preparing itself for a recovery. It’s cut head count several times and reorganized its business from the bottom up.

There’s plenty of risk here. In the past, Wayfair was not able to scale without bleeding cash and becoming an unnecessarily bloated organization. Long-term investors need to have confidence that given another chance, Wayfair will do it right.

It might still be too early for most investors to take a chance on Wayfair stock. But if you have an appetite for risk, you might want to take a small position and gain from a recovery.

John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Jennifer Saibil has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon. The Motley Fool recommends Wayfair. The Motley Fool has a disclosure policy.

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