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1 Brilliant Stock To Buy In December And Hold For The Next 5 Years
December is a great time for investors to look at stocks or industries that have underperformed over the past year but that could be ripe for rebounds in the next one. One market that's showing early indicators of improvement is housing. Pending home sales increased by 2% month over month in October, according to the National Association of Realtors. That was the metric's third consecutive month of growth.
A rebound in home sales would be great news for home-goods e-commerce player Wayfair (NYSE: W). Its stock is down by almost 85% from its 2021 peak. Wayfair posted high double-digit percentage revenue growth every year through 2020. But after a massive surge in the early stage of the pandemic as customers spent heavily to improve the comforts of their homes during social distancing, its sales moderated. Then in 2022 and beyond, consumer spending and the housing market further weakened under the weight of rising interest rates and inflation.
Here are three reasons to buy and hold Wayfair stock this December.
1. Wayfair is showing stable revenue performance
The improvement in pending home sales has come as the Federal Reserve began cutting its benchmark interest rate. It reduced the Federal funds rate by 50 basis points in September and another 25 basis points in November. Experts generally expect another cut when the Federal Open Market Committee meets again this week.
These reductions, and further cuts to come, could lead to moderating interest rates for borrowers at the consumer level over the next year. However, Wayfair is still seeing its customers behaving judiciously with their spending. Its revenue was down 2% year over year in Q3, but more importantly, its sales are showing signs of stabilizing around their current levels -- which remain well above 2019 levels.
The company's quarterly revenue peaked at $4.3 billion in Q2 2020, but it has started to flatten out over the last year at around $2.8 billion. Stable revenue allows management to better focus on shoring up profitability.
Importantly, about 10 million of its 21 million active customers are higher-frequency shoppers, placing four or more orders with it over the last 12 months. "We see an important opportunity to grow that figure given shoppers typically purchase in the category six to eight times per year," CEO Niraj Shah said on the Q3 earnings call.
A growing housing market would make it much easier for management to accomplish its goal and return to growth.
2. Wayfair has improved its cost management
One reason the stock fell sharply was that lower revenue created a setback for the company's bottom line, which first reached positive territory during the pandemic. Free cash flow hit a peak of $1.5 billion in Q1 2021 before collapsing to negative $1.1 billion in Q4 2023. But over the last year, management has brought free cash flow back above breakeven to $43 million.
Management credits that improvement to better cost efficiency and spending discipline. It has achieved a positive adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) margin in the last two quarters, and management is guiding for its EBITDA margin to be in the 2% to 4% range in Q4.
For most of its history as a publicly traded company, Wayfair operated as a positive cash flow business. The ups and downs in the home goods market caused a lot of choppiness in Wayfair's finances, but it appears that management has the business in a good position ahead of a recovery.
3. Wayfair stock has an attractive valuation
It's unclear if Wayfair can ever return to the high double-digit percentage revenue growth rates it saw prior to 2020, but it has tremendous opportunities to grow. A recent report from market research firm 2 Visions on the e-commerce home decor market found that 82% of consumers are open to shopping for home decor items online, and Wayfair is one of the top online shopping destinations for such goods.
The current share price of $54 gives it a price-to-sales (P/S) ratio of 0.55. Most discount retailers will trade at P/S ratios of less than 1.0 since these businesses typically operate at razor-thin margins, but Wayfair's P/S valuation could rise if it returns to growth.
If Wayfair can grow its revenue by 10% annually, which would be in line with the growth of the broader e-commerce market, a modest increase in its P/S multiple would send the stock soaring.
The biggest threats to Wayfair's business have always been severe downturns in the housing market, rising inflation, and falling consumer discretionary spending. The worst of those issues now appear to be in the rear-view mirror for this cycle, making this a great time to consider grabbing Wayfair stock at a bargain valuation before an upturn in demand for its wares.
Should you invest $1,000 in Wayfair right now?
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John Ballard has no position in any of the stocks mentioned. The Motley Fool recommends Wayfair. The Motley Fool has a disclosure policy.
