Outstanding Investment Worth Purchasing in December, Suggested for Long-Term Holding Period of 5 Years
December is an excellent time for investors to examine stocks or sectors that underperformed during the past year, but might be primed for rebound in the upcoming period. A sector showing early signs of recovery is housing. The National Association of Realtors reported a 2% increase in pending home sales in October, marking the third consecutive month of growth.
The uptick in home sales would be a significant boon for e-commerce player Wayfair (W), whose stock has plummeted by almost 85% from its 2021 peak. Despite posting high double-digit revenue growth each year up till 2020, Wayfair's sales saw a slowdown after the early pandemic surge. The moderate sales, coupled with weakening consumer spending and the housing market under the burden of rising interest rates and inflation, led to a steep decline in Wayfair's stock value.
This December, there are three compelling reasons to continue investing in Wayfair stock:
1. Steady revenue performance
The positive trends in pending home sales have coincided with the Federal Reserve lowering its benchmark interest rate. It reduced the Federal funds rate by 50 basis points in September and 25 basis points in November, with experts anticipating another cut during the Federal Open Market Committee's meeting this week.
These rate reductions may foster a more relaxed interest environment for borrowers over the next year. However, Wayfair continues to witness customers acting prudently with their spending. Whilst its Q3 revenue decreased by 2% year-over-year, sales appeared to be stabilizing around their present levels, which remain much above 2019 levels.
The company's peak quarterly revenue was $4.3 billion in Q2 2020, but it has been steady around $2.8 billion in the last year. This stability enables management to focus more attentively on profitability enhancement.
Reassuringly, about 10 million of its 21 million active customers are frequent shoppers, placing four or more orders within the last 12 months. The CEO, Niraj Shah, mentioned the potential to boost this figure during the Q3 earnings call, as shoppers typically make six to eight purchases in the category annually.
A flourishing housing market would significantly facilitate management's goal to revive growth.
2. Enhanced cost management
One of the reasons for Wayfair's plummeting stock price was the impact on its bottom line due to slipping revenue. Free cash flow surged to $1.5 billion in Q1 2021 but dwindled to negative $1.1 billion in Q4 2023. However, over the past year, management successfully steered free cash flow back above breakeven to $43 million.
Management attributes this improvement to better cost management and spending discipline. Wayfair has accomplished a positive adjusted EBITDA margin in the last two quarters and is forecasting an EBITDA margin of 2% to 4% in Q4.
For the majority of its publicly traded history, Wayfair functioned as a cash flow-positive entity. The fluctuations in the home goods market led to instability in its finances, but it now seems that management has placed the business on a firm footing ahead of a recovery.
3. Attractive stock valuation
Whilst it remains uncertain if Wayfair can reclaim the high double-digit revenue growth rates pre-2020, there are ample growth opportunities. A recent market research report on the e-commerce home decor market revealed that 82% of consumers are open to shopping for home decor items online, with Wayfair being one of the top online shopping destinations for such products.
The current stock price of $54 gives it a price-to-sales (P/S) ratio of 0.55. Typically, discount retailers trade at P/S ratios under 1.0, given their thin profit margins. However, Wayfair's P/S valuation could appreciate if it returns to growth.
If Wayfair manages a 10% annual revenue growth rate, which aligns with the broader e-commerce market growth, an uptick in its P/S multiple could send the stock skyrocketing.
The main challenges to Wayfair's business have historically been severe housing market downturns, escalating inflation, and waning consumer discretionary spending. The worst of these concerns now seem to be in the past, making December a promising time to consider snapping up Wayfair stock at an appealing valuation before a spike in demand for its product offerings.
Given the stable revenue performance, enhanced cost management, and attractive stock valuation of Wayfair, investors might consider diversifying their finance portfolio by investing in this company's stocks. The company's steady revenue, improved cost management, and low price-to-sales ratio make it an appealing option in the housing sector, which is showing signs of recovery.
