Wayfair's Valuation is Way Too Unfair

While Citron Research describes Wayfair (W) as their best short idea to date, Whitney Tilson has also taken a bearish stance and revealed that Wayfair is his largest short position. Wayfair engages in the e-commerce business in the United States. It offers approximately seven million home products under various brands. While the company has witnessed tremendous revenue growth over the last few quarters, I will have to agree with both Tilson and Citron that the stock is grossly overpriced.

I have never been a fan of companies that compromise with profits so as to report massive revenue growth.
This strategy simply isn’t sustainable and I have always recommended investors to short the stocks that fall in this bracket. I have suggested shorting companies like Yelp, Angie’s List, Plug Power, Pandora, etc. and Wayfair is heading down the same road.

All the above-mentioned companies witnessed strong revenue growth during the early phase of their business, however the stocks fell considerably once the growth stopped. Wayfair is still in the “revenue growing” phase, which is why it I think it the ideal time to short the stock.

The company competes against the likes of Wal-Mart, Target, Home Depot, etc. and has no considerable competitive advantage over them. The company has managed to grow only by selling its products at cheap prices and spending heavily on advertising. Although these strategies have doubled the company’s market cap over the last few months, it is unsustainable in the long-run.

For a company that has been selling its products at an overall loss, Wayfair is massively overvalued and holds massive downside potential.  Thus, it isn’t surprising that many people are betting against the stock. The company will likely manage to record double-digit revenue growth for another quarter as the bar is set pretty low. However, the company’s growth will likely slow down within 6-12 months as y-o-y comparison become tougher. Once revenue growth plunges, investors will start dumping Wayfair at a hectic pace.


Wayfair’s days of double-digit revenue growth will soon come to an end. The company is still trading at a premium and it represents one of the best shorting opportunities in the present market. I believe the stock can fall as much as 80% once the inevitable revenue slowdown occurs. I believe that the stock will be trading under $10 before the end of 2016 and would suggest investors to short it at the present valuation.
Published on Nov 19, 2015
By Ayush Singh

Copyrighted 2020. Content published with author's permission.

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