Morgan Stanley Says Wayfair Will Be Profitable, But Later Than Expected

The bullish case for Wayfair Inc (NYSE: W) is based on the belief the online furniture retailer is building a large enough moat and can generate sufficient operating leverage to become highly profitable. Morgan Stanley projects that this will likely be the ultimate outcome for the company — just not as soon as bulls hope for.

The Analyst

Morgan Stanley's Simeon Gutman initiated coverage of Wayfair's stock with an Equal-weight rating and $75 price target.

The Thesis

Wayfair's longer-term revenue growth potential of 20 percent should be sustainable over the coming years and should result in a positive EBITDA margin, Gutman said in a Wednesday initiation note.

The current consensus estimates that imply Wayfair will report a 4-percent adjusted EBITDA margin by fiscal 2022 — a projection that "looks too aggressive" considering the company's rising acquisition costs and a growing competitive landscape.

A key component to Wayfair's ultimate profitability hinges on ad spend per incremental customer, the analyst said. The problem for the company is that ad spend per incremental customer is rising and resulting in deepening losses on new customers, Gutman said. Losses on new orders are likely to outpace improving profits from repeat orders, he said. 

It won't be until fiscal 2021 when Wayfair sees an inflection point toward the analyst's estimate of a 4-percent EBITDA margin target by fiscal 2027.

In Morgan Stanley's longer-term view, Wayfair will eventually earn a profit, which suggests a bearish stance on the stock is unwarranted, Gutman said. The stock is trading at 0.8x 2019E sales, which represents a "steep discount" to global e-commerce players at 4x 2019E sales, the analyst said. 

Price Action

Wayfair shares were trading down 1.85 percent at the time of publication Wednesday. 

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Photo courtesy of Wayfair.