After the stock market's strong returns this year, it's challenging to find stocks that have fallen. Growth stocks, in particular, have had a good run. The S&P 500 Growth Index has gained 40.4% this year (through Dec. 16). That's more than 28 percentage points higher than the S&P 500 Value Index's 11.9%.
Wayfair (W -1.91%) performed well during the early days of the pandemic with high revenue growth. The company rewarded shareholders with outsized gains. But times have been challenging more recently, and the stock has dropped more than 17% this year.
However, while it's challenging to go against the market, those willing to bear the risk seem likely to bear the rewards. Wayfair is a stock that has a big potential upside.
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Wayfair's business is economically sensitive
Wayfair sells a range of home goods online at different price points. During the early days of the pandemic, when many people were stuck at home, they flocked to online ordering. Wayfair's 2020 revenue grew 55% to $14.1 billion. It also turned in a profit under U.S. generally accepted accounting principles (GAAP) of $1.86 a diluted share compared to a $10.68 loss.
The revenue growth proved unsustainable. Third-quarter 2024 revenue dropped 2% versus a year ago, to under $2.9 billion. It's small comfort to investors that Wayfair's loss narrowed to $0.60 a share from $1.40 a year ago.
However, larger economic forces have been at work, and it's not solely Wayfair that's been affected. For instance, home products retailer Williams-Sonoma's (NYSE: WSM) fiscal third-quarter revenue dropped 2.9% to $1.8 billion for the period that ended on Oct. 27.
Better times ahead for Wayfair?
With people feeling pressured by high costs for basic items like food and housing, it's challenging for them to make expensive purchases of things like furniture. However, there have been some promising early signs that things have been moving in the right direction.
Inflation remains stubbornly high, with the Consumer Price Index (CPI) increasing 2.7% on an annualized basis in November. But that's a much lower inflation rate than in the recent past. For instance, inflation was 6.5% in December 2022. If it keeps moving in the right direction, consumers will undoubtedly feel more comfortable splurging on discretionary items.
Housing sales could also see an increase. Existing home sales rose 3.4% in October, reversing a trend of sluggish sales. As people buy homes, they're likely to shop for home goods like furniture. That should benefit Wayfair.
Wayfair is a beaten-down stock
Since Wayfair doesn't report profits, investors need to find another valuation metric besides the price-to-earnings (P/E) ratio. The price-to-sales (P/S) ratio is an oft-used alternative. Wayfair's stock trades at a P/S multiple of 0.5. That's much lower than the 10-year median of 1.3, which covers most of the company's history as a public company.
Of course, Wayfair stock is not for the faint of heart. There's no guarantee that housing sales will continue increasing or inflationary pressures will ease anytime soon. That delay would continue hurting Wayfair's near-term revenue and profitability.
However, the economic conditions won't persist forever. With its broad offerings and convenient online shopping, Wayfair should be in a prime position to benefit. It's a risk, but one that can provide outsize gains over the long term.
