Home furnishings portal Wayfair (NYSE: W) is one of online retail’s biggest success stories. Yet Wayfair loses money and suffers from shrinking revenues.
Wayfair is the seventh largest online retailer in the United States in November 2019, Statista estimates. Statista estimates Wayfair had net sales of $4.766 billion in 2018.
In fact, Wayfair’s online sales exceed those of retail legend Costco Wholesale (NASDAQ: COST).Statista estimates Costco’s 2018 online sales at $4.174 billion.
Wayfair is Growing Faster than Amazon
Moreover, Wayfair is growing at a dramatic rate. Stockrow estimates Wayfair’s revenues grew by 35.17% in the quarter ending on 30 September 2019. However, that growth rate was down from 41.56% in the previous quarter.
In contrast, Amazon’s (NASDAQ: AMZN) sales grew at a rate of 23.69% in the quarter ending on 30 September 2019. Thus, Wayfair is growing faster than Amazon.
Notably, Mr. Market paid $87.04 for Wayfair shares and $1,818.51 for Amazon shares on 27 November 2019. So Wayfair grows faster than Amazon but its stock is far cheaper. Plus, Mr. Market paid $300.76 for Costco Wholesale on 27 November 2019.
Wayfair Loses Money
Despite the success, Wayfair (NYSE: W) loses money. For example, Wayfair reported a quarterly net loss of -$272.04 million and a quarterly operating loss of -$259.71 million on 30 September 2019.
Moreover Wayfair reported a negative operating cash flow of -$76.44 million, an “investing cash flow” of – $89.97 million, and a “free cash flow” of -$180.90 million on 30 September 2019. However, Wayfair reported a positive financing cash flow of $788.34 million on 30 September 2019.
Unfortunately, the positive financing cash flow indicates Wayfair is borrowing money to stay in operation. Hence, Wayfair is using Jeff Bezos’ business model of borrow, borrow, and borrow more, to get as much market share as possible.
Can Wayfair Compete with Amazon?
Dramatically, I think the latest financial numbers provide evidence that Wayfair cannot compete with Amazon.
For example, Wayfair’s quarterly revenues shrank from $2.343 billion on 30 June 2019 to $2.306 billion on 30 September 2019. Wayfair has experienced revenue shrinkage before; the revenues shrank from $2.014 billion on 31 December 2018 to $1.945 billion, on 31 March 2019. However, the holiday shopping season could explain that shrinkage.
Interestingly, Amazon’s revenues grew from $63.404 billion on 30 June 2019 to $69.981 billion on September 2019. In addition, Amazon’s revenue growth rate grew from 19.89% on 30 September 2019 to 23.69% on 30 September 2019.
Is Amazon Stealing Wayfair’s Marketshare?
Consequently, I have to wonder if Amazon is stealing market share from Wayfair. I think there is a strong possibility that Amazon has an algorithm or an artificial intelligence (AI) that can track Wayfair’s sales and undercut Wayfair’s prices.
Moreover, Wayfair’s gross profit fell slightly last quarter. In detail, Wayfair reported quarterly gross profits of $559.6 million on 30 June 2019 and $539.92 million 30 September 2019.
In the same period, Amazon’s quarterly gross profit grew from $36.337 billion to $41.302 billion. Meanwhile Amazon’s quarterly revenues grew from $63.404 billion in June to $69.981 billion in September.
How Amazon can destroy Wayfair
Therefore, I have to wonder if Amazon is stealing Wayair’s market share. Remember, Amazon reported $43.401 billion in cash and short-term investments on 30 September 2019. Thus, Amazon has the money to develop technology just to wipe out a competitor such as Wayfair.
Meanwhile, Wayfair reported $1.301 billion in cash and short-term investments on 30 September 2019. Amazon’s cash stash is over forty times the size of Wayfair’s.Hence, I think Wayfair does not have enough money to compete with Amazon.
However, Wayfair’s cash nearly doubled over the last quarter. In detail, Wayfair’s cash and short-term investments grew from $675.11 million in June to $1.301 billion in September. Wayfair is keeping more cash but I do not believe it is enough to compete with Amazon.
Stay away from Wayfair (NYSE: W) stock
I think investors need to stay away from Wayair’s stock. I think Mr. Market overpriced Wayfair at $87.04 on 27 November 2019.
I believe Mr. Market grossly overprices Wayfair because the company makes no money. In addition, the cash from financing number shows Wayfair is burning through a lot of cash.
Therefore, Wayfair could run out of money and collapse. Consequently, I think Wayfair’s future is as part of a larger organization.
Another company will buy Wayfair to get its market share and strong brand. Potehntial buyers for Wayfair include private equity firms, Target (NYSE: TGT), Walmart (NYSE: WMT), the TJX Companies (NYSE: TJX), and Macy’s (NYSE: M). A dark horse buyer is Berkshire Hathaway (NYSE: BRK.B) which loves to buy struggling firms with strong brands and large market share.
Wayfair is a lousy investment
In the final analysis, I think Wayfair is a great acquisition target but a lousy stock for ordinary investors. In particular, Wayfair pays no dividend and will not pay one soon. Wayfair pays no dividend because it makes no money.
Wayfair proves you can attract a lot of customers and build a strong brand online without making money. In addition, Wayfair shows that companies like Macy’s (NYSE: M) strong online brands may not save them from the retail apocalypse. In fact, Statista estimates Macy’s was the seventh largest US online retailer in 2019.
Wayfair shows selling a lot of merchandise online is easy. Unfortunately, Wayfair demonstrates that making money online is hard.
Finally, Wayfair shows that investors need to be leery of retailers that tout their big online sales. Those sales do not always make money.