Wayfair Longs Should Be Prepared for Dilution

Wayfair (W) shares have gained almost 10% value in the last few weeks owing to strong holiday sales and mild insider buying. The stock is still way off the all-time highs, but is still up considerably YTD. Although Wayfair is witnessing strong sales, the short argument for the company is still intact. Hence, I think can still consider shorting the stock.

Wayfair is on the same path as unprofitable companies like Yelp, Angie’s List, and Westport etc. and I can see the company’s shares falling as much as 75% in the next 12 months, which is why I think investors should consider selling the recent rally.

Strong Holiday sales don’t matter

Wayfair recently announced that gross sales increased 109% during the five-day Thanksgiving holiday shopping period.
In addition, direct retail sales were up 130% for the period. Shares moved higher in response, but the company is getting worse by the day.

Wayfair has managed to outperform its rivals during the holiday season, but the company is selling its product at an overall loss and this strategy is unsustainable. In the long run, I can see Wayfair falling prey to the likes of Amazon, Target, and Wal-Mart. Thus, I would recommend investors to not focus on the company’s revenue growth.

Wayfair’s stock is up almost 90% YTD, but the company’s business model doesn’t justify such massive appreciation. Wayfair is constantly reporting losses as the company has focused on increasing sales by sacrificing its profits.

Clearly, this strategy is unsustainable and the stock deserves to be trading at a much lower valuation. In addition, many of the early buyers of Wayfair’s shares have started dumping the stock. The increasing amount of Class A shares signifies that many insiders have dumped the stock over ever since Wayfair went public and will continue to do so before the stock plunges to single digit.

Dilution is coming

Given the company’s over valuation and cash burn rate, investors can expect Wayfair to initiate a secondary offering. Wayfair is burning cash at a rapid rate and the company’s unsustainable business model will soon demand more money. The best way to generate that for Wayfair will be to make the most of its overvaluation by diluting shares. Although diluting isn’t a long-term solution, the company will delay its plunge to single digits by having more cash to burn.

Conclusion

Due to the reasons mentioned above, I think Wayfair is a compelling short. The company is trading at a very high valuation and investors can expect to see a secondary offering very soon. With the company sacrificing profits and margins to grow revenue, it won’t be long before its shares fall to single digits. Hence, I’m calling Wayfair a short again at $42.
Published on Dec 7, 2015
By Ayush Singh

Copyrighted 2016. Content published with author's permission.

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