Profit From Trading Wayfair Before Its Eventual Crash

Despite having a very high short float, Wayfair (W) had managed to successfully shrug off the bear criticism. The stock had rallied considerably from its 52-week low levels. However, the recent earnings report put an end to its rally, which, in my opinion, had gone way too far.

Earnings strengthens the bear case

As my readers would know, I have been bearish on Wayfair for quite some time. In fact, Wayfair was my best short idea heading into 2016. Wayfair is only down about 15% since I recommended shorting it.
I expected the stock to drop under $20 by the end of 2016. However, it looks like Wayfair, due to its strong revenue growth, has managed to sustain its overvaluation. That being said, I still expect Wayfair to fall under $20 in the long-run and the company’s latest quarterly earnings further cemented the long-term bear case.

In the latest reported quarter, Wayfair saw revenue jump of 60% year over year to $787 million, beating the analysts’ estimates by $4.5 million. Given the strong revenue growth, it isn’t surprising that Wayfair has managed to sustain its overvaluation.

As I have said time and again in the past, companies that continue growing at the cost of profits tend to perform well when the growth is strong. However, once the growth slows down, investors realize that their business model is unsustainable and they crash hard.

In the past, I have recommended shorting several companies that followed the same business model like Yelp (YELP), Plug Power (PLUG), SolarCity (SCTY), etc. I strongly believe that Wayfair is headed down the same path. That being said, traders can still benefit from buying the stock as I believe its strong revenue growth can push the stock higher after the recent crash.

Wayfair plummeted 20% yesterday and the crash was fueled by an earnings miss. Wayfair’s EPS came in at -$0.43, missing the consensus by two cents. Wayfair’s cost are growing at a faster pace than its revenues, which was expected given the company’s expansion into Europe.

However, costs growing faster than revenue is a sign that Wayfair’s business model is unsustainable in the long-run, which is why I would advise investors with long-term horizon to either stay away from the stock or short it.


Despite all the negatives, from a trading perspective, I think Wayfair is currently a buy. Given that the company’s revenue growth is still going strong, I think the stock will recover some of the post-earnings losses in the coming weeks. Thus, investors can consider buying call options or buying the stock for the short-term.
Published on Aug 10, 2016
By Ayush Singh

Copyrighted 2020. Content published with author's permission.

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