Why Wayfair Is Still a Great Short

Wayfair (W) has been a very volatile stock over the last few months. While the company has drawn comparisons to Amazon (AMZN) due to its surging revenue growth and lack of profitability, I wouldn’t recommend holding onto the stock, especially going into the earnings season.

There are many tech stocks that soar when the revenues are growing, but then crash suddenly as soon as the growth slows down. Although Wayfair is reporting strong growth right now, it is only a matter of time before the company’s growth slows down drastically.

I have recommended shorting several companies that focused on revenue growth at the cost of profitability before, and most of those companies have lost significant value.
Most of those companies had an unprofitable business model and were destined to fall in the long run. The likes of Yelp (YELP), SolarCity (SCTY), Plug Power (PLUG) etc. are trading at a fraction of the value than when I recommended shorting the stock.

Wayfair falls in the same category as the company’s poor margins and unprofitable business makes it impossible for it to be a resolute long-term business. With Wayfair expanding into the international market, the company’s sales will likely continue growing at double-digit speeds for at least a few more quarters. However, the company’s expenses are set to rise as well.

While bulls argue that Wayfair is cash flow positive, the company has been spending a lot on stock-based compensation. In fact, over the last 12 months, Wayfair’s shares outstanding have grown from 84 million to 84.7 million. Although the rise isn’t meteoric, it does dilute the equity ownership of individual investors. High stock based compensation along with high insider selling is a potential red flag for Wayfair longs.  Other red flags include no profitability, increasing expenses and lack of earnings power.

Wayfair is a stock I would recommend shorting at current levels. With the market is already hovering near all-time high levels, the chances of Wayfair moving higher are very low. Granted shares can soar on the back of a good earnings report due to the high short interest. But in the long-term, I expect Wayfair to head lower. Due to the high short interest, shorting Wayfair may be a bit difficult right now. However, investors can also short the stock by buying put options. Although buying put options would involve timing the movement of the stock, I think the risk/reward ratio favors investors who are betting against Wayfair in the short as well as long-term.
Published on Aug 1, 2016
By Ayush Singh

Copyrighted 2020. Content published with author's permission.

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