Consumer cyclical company Wayfair (W) stunned Wall Street today as it surged to $69.62, marking a 11.7% over its pevious close. W is still -16.8% below its average analyst target price of $83.65, which implies there may be more upside for the stock. However, the average analayst rating for the stock is hold -- a more pessimistic outlook than you might expect.
Over the last year, Wayfair has underperformed the S&P 500 by 71.2%, moving -77.7%. Clearly, some investors think that now is the time to buy the dip. But do the fundamentals support this course of action?
Consumer cyclical companies produce goods in the automotive, entertainment, housing, travel, apparel, and luxury retail industries. The products and services sold in these industries are discretionary, meaning that they are not essential to day-to-day life. Demand for these goods and services depends largely on growth cycles of the whole economy because consumers will tend to purchase more during times of strong economic growth, but then dial back their consumption during recessions.
As a result, consumer cyclical companies such as Wayfair tend to be more volatile in comparison to non-cyclical, or defensive stocks, whose markets are less affected by economic contractions and recessions. The upside is that cyclical companies may offer a greater potential for performance -- especially if an investor can successfully ride an upswing in the economic growth cycle. It's still unclear whether the US will enter a longterm recession, so a consumer cyclical may prove a risky investment.
Wayfair does not publish either its forward or trailing P/E ratios because their values are negative -- meaning that each share of stock represents a net earnings loss. But we can calculate these P/E ratios anyways using the stocks forward and trailing (Eps) values of $-3.93 and $-4.478. We can see that W has a forward P/E ratio of -17.7 and a trailing P/E ratio of -15.5.
Gross profit margins are the company's revenue minus the cost of goods only, and doesn't take into account taxes and overhead (wich is taken into account in net earnings, which we analyzed above). Analyzing gross profit margins as opposed to net (operating) margins gives a better picture of the company's pure profit potential and pricing power in its market, unclouded by other factors. As such, it can provide insights into the company's competitive advantages -- or lack thereof. W has gross profit margins of 27.4%, from which we can infer that its competitive advantage is probaly not absolute, and is facing some pricing pressure from other companies within the same market.
The revenues and earnings related to sales are only a part of the financial puzzle of large coorporations, which have many costs and expenses arising independently form their core business: cost of maintaining debt, rent payments, return on capital inverstments, depreciation, etc. When all of these separate cashflows are taken into account, we are left with the copany's levered free cashflow, which for Wayfair is $-395,486,016.
The company's cashflows since 2018 have been negative, with the exception of 2020 and 2021 when consumer demand saw a bump during the pandemic. This negative trend, combined with negative P/E ratios, and no clear sign of a sustianed competitive advantage, may cause some investors to pause before investing. For more daily updates on the stocks that are moving the markets, subscribe to our free newsletter!
