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The following segment was excerpted from this fund letter.
Wayfair (NYSE:W)
With the benefit of hindsight, it is clear that the timing of my investment in Wayfair left something to be desired. I had underestimated the degree to which going from a “covid beneficiary” to a post-covid would hurt the share price.
As the market frequently does, it extrapolates recent performance too far. When things are going well, positive momentum hits the stock; when the environment is more challenging, companies can be priced as if they are imminently going out of business. At times like this, it is good to re-assess a position to decide if the issues are likely transient or fundamental.
Wayfair has compounded revenue at over 30% per year to a substantial $14bn. However, as with many fast growth tech companies, it did not turn a profit, except in 2020 when Wayfair generated approximately $900m operating profit. (I deduct stock compensation and depreciation from their reported EBITDA numbers, as these are real expenses to my mind). I believe this shows the company can and will be profitable. Unlike many of its tech peers, Wayfair was never valued at obscene sales multiples, reaching a modest 2.6x revenues at its maximum.
At today’s approximate $6bn market capitalization, we do not need any heroic assumptions of future profitability to drive a good return. Management has always had a very long-term focus, investing well ahead of the company’s size to prepare it to take a share of the online furniture retail market. Some of these investments, such as its supply chain logistics, which is especially suited for bulky furniture items, have served the company well and positioned it to continue competing effectively in the future.
On the other hand, it has been too aggressive with hiring its technology staff, many of whom work on projects that won’t impact the company for several years to come, which has inflated operating costs. This isn’t the first time Wayfair has over-hired.
Nevertheless, I am pleased that management, most likely due to shareholder pressure, noted the need to “balance our long-term focus on the massive market opportunity and the shorter-term realities of the environment in which we are operating.”
I will be looking for evidence of better operational controls over the next few quarters.
Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.
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