We’re booking the win on our Wayfair short call, for now. The risk reward over the near term slightly favors the bull side as we see it… ~15% down, 20% up. The stock is nearly at its trough EV/LTM Sales multiple of 1x where it trades when revs slow, and the stock has pulled back over 50% from the March highs.
Our call was that competition and macro forces would pressure Wayfair’s growth and (already awful) operating margins. To be clear, when we made the call, almost everyone was afraid to short this stock having been burned in times of accelerating revenue. It was like Netflix and Amazon (both are Hedgeye Short calls in 2019 FYI).
This was a disaster quarter for Wayfair in-line with our thesis.
US direct revenue grew 34% slowing 600bps vs last Q, a 500bps slowdown on a 2 year basis. International revenue accelerated 500bps to +46% on a much easier compare meaning a 1550bps slowdown on a 2 year basis. EBITDA margins were down over 200bps in both segments. The company is guiding to even further slowing in 4Q, with the US to grow ~25%, and International to grow only ~30%. Remember when revenue growth was slowing and management said not to focus on percentage growth, but rather dollar growth? Well what do you focus on when dollar growth slows? Well, we know its not profits, because there aren’t any (and likely never will be).
Keep in mind this company is burning cash rapidly. It will likely have to raise capital again within a couple years, and remember that the stock price going up is necessary to properly compensate Wayfair’s quality employees (over use of equity comp). These are some big long term risks to equity value.
This company is still growing topline rapidly, and people keep wanting to believe in this as a long term winner, we would not be surprised to see a rally. There is decent chance we are back involved in this one in the next 6-12 months, but the market is clearly seeing what we saw 8 months ago and that means it shouldn’t remain a best idea short here.
What would get us bullish and/or what is it worth?
First, International needs to be shut down. There is now way this is ever going to make money. A negative 24% EBITDA margin this quarter, guided to grow about the same as US next Q at 1/6th the size… International was a mistake, flat out.
As we think about value here, W is not a $0. There is a buyer at a price (Wayfair has great talent and some quality assets which it's built), but that price is probably still a good $20-$30 below where we are today. There may even be the ability for some real profitability on a smaller revenue base.
If we saw International shut down, see salaries being increased for employees instead of relying on stock comp, see the chance for revenue to re-accelerate, and a stock price below ~$55, Wayfair might find itself on the our bull side of the ledger again.
Here’s the playbook from our Black Book on March 11th 2019.
If interested in the whole presentation, CLICK HERE
