Shorting Wayfair Is Even More Compelling Now

Wayfair (W), which I have touted as one of my best short ideas for 2016, released its Q4 and full year earnings yesterday. Wayfair managed to beat the analysts’ estimates on revenue as well as earnings by a hefty margin. Given the high short float of Wayfair, shares popped roughly 10% following the earnings release.

Given the 10% pop, I think Wayfair is an even more attractive short for investors who can stomach the volatility in the stock. I’ll give you the reasons why I think Wayfair is a short, but first let’s take a look at the company’s earnings report.

For the latest reported quarter, Wayfair’s earnings came in at -$0.07, beating the analysts’ estimate by $0.07.
As for top-line, Wayfair recorded another quarter of strong growth as sales jumped 81% year over year to $740 million, beating the analysts’ estimate by again by roughly $61 million. For Q1, Wayfair guided for Q1 revenue of $660 million-$700 million, ahead of the consensus of $625.7 million.

While the earnings report look good, I think investors shouldn’t focus on Wayfair’s growth and narrowing losses. Instead, investors should focus on the fact that Wayfair will never be able to turn profitable.

Given the strong growth of Wayfair, I don’t think there’s any reason for the company’s founders to dump stocks. However, despite the double-digit growth, insiders have dumped over $50 million worth of Wayfair’s shares.

Wayfair is a drop ship retailer, meaning that the company simply takes orders from customers and passes them on to the manufacturers. Manufacturers then pack, and ship the products directly to the customers. Wayfair gets a small commission from product sales.

Given Wayfair’s business model, it is very difficult for the company to grow its margin. While Wayfair has managed to grow its revenue substantially thanks to the high marketing expense, the company will not turn profitable. In fact, Wayfair’s gross margin fell 30 basis points year over year to 23.8%. To make matters worse, ad expense jumped 61% year over year to $88 million.

Wayfair can continue growing revenue and narrowing losses by spending heavily on ads. However, in the long-term, investors will realize that the company can never be profitable, which is when its share price will start dropping. Thus, I think after yesterday’s 10% pop in Wayfair’s share, I think it is an even more compelling short.


Despite Wayfair’s better-than-expected quarter, I think investors should short the stock after yesterday’s 10% jump. The company’s business model is still not sustainable in the long-run as it will never turn profitable.
Published on Feb 26, 2016
By Ayush Singh

Copyrighted 2020. Content published with author's permission.

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