by Dave Kranzler of Investment Research Dynamics
Wayfair is one of the tech-borne “unicorn” style companies which has become a symbol of the most over-inflated stock bubble in U.S. history. The dot.com bubble on steroids. Its business model is geared to generate sales growth as a device to inflate the company’s market cap by enticing enough volume from momentum chasing gamblers to enable the insiders to dump shares in copious quantities.
The problem for anyone holding the stock as an “investment,” as opposed to renting the stock long enough in hopes that another stock renter will come along and pay a higher rental rate, is that the business model is hopelessly unprofitable and the operations now burn an increasing amount of cash every quarter.
For the full year 2019, Wayfair lost $929 million on an operating basis. Its pre-tax net loss was nearly $1 billion and nearly double the pre-tax loss in 2018, which was more than double the pre-tax loss in 2017. W’s operations burned $196 million in cash (from the cash flow statement) in 2019 (these numbers include the add-back for non-cash stock comp). In those three years long term debt more than quadrupled from $333 million in 2017 to $1.5 billion by the end of 2019.
In its first quarter 2020 reported today, Wayfair’s operations lost $284 million, this was a 36% increase in its operating loss from Q1 2019. Its operations burned $256 million in cash in Q1 2020, inclusive of the non-stock comp add-back, more than triple the cash burn in the year earlier quarter.
After the quarter ended, just 7 days into Q2, Wayfair issued another $535 million in debt to bring its debt-load over $2 billion. Granted its debt consists of convertible bonds, but the Company still incurs cash interest expenses plus principle accretion. This is notwithstanding the potential massive share dilution if/when the converts convert.
And management wants the market to believe that the business model will “turn positive this quarter.” Hmmm…Management also gushed over the increase in traffic to its website and increase in sales. This assertion from the CEO, Niraj Shah, is absurd: “all incremental revenue will be additive and we would expect it to generate additional profitability this quarter.”
What? To begin with “incremental revenue will be additive” is a redundancy. If corporate CEO’s are going to rip off public shareholders, at least learn proper use of the language. How can this added x 2 revenue generate “additional profitability?” W has not been profitable in over two years. If it were the case that W was going to generate profitability from the increase in sales, why did Company roll out an 80% off sale in April?
Funny thing about management’s confidence. It’s not putting its money where its mouth is. Over the last three months insiders dumped over 1 million shares right up to five business days before Q1 earnings were released.
Wayfair clearly drives its revenues by selling its products at a price which is highly competitive in cyberspace but not nearly high enough to cover the all-in cost of operating its business model. If it charged prices which enabled it generate an operating profit, its sales would be hit hard. If it continues forward using the same revenue generation strategy, the Company will hit the wall when it runs out of cash.
Wayfair’s existence is attributable exclusively to the money sloshing around the financial system from Fed money printing. At some point the market will no longer be willing to risk throwing capital into W’s black hole and it will be lights out, with shareholders left holding the bag.