1 Main Capital, in their Q1 2021 investor letter, mentioned Wayfair Inc. (NYSE: W) and shared their insights on the company. Wayfair Inc. is a Boston, Massachusetts-based online store company that currently has a $32 billion market capitalization. Since the beginning of the year, Wayfair delivered a 36.74% return, extending its 12-month gains to 139.72%. As of April 26, 2021, the stock closed at $308.78 per share.
Here is what 1 Main Capital has to say about Wayfair Inc. in their Q1 2021 investor letter:
“The Fund has several positions that capitalize on this theme. Our two favorites (includes) Wayfair (W). The simplest way to explain these two holdings are that people will buy more houses in the next five years than they did in the prior five and these new houses will need to be furnished.
Wayfair Inc (W) is one of the largest global home goods and furniture e-commerce platforms. Despite growing revenues by more than 15x since 2013, the company’s growth outlook remains bright.
To put some numbers around the opportunity, W believes that its $14 billion of 2020 revenues represented just 2% of an estimated $840 billion addressable market for the home category. More importantly, e-commerce penetration for the home category is currently only around 20%, well below some of the more mature categories which are greater than 50% penetrated.
In the coming decade, the home goods addressable market is expected to grow meaningfully, while ecommerce penetration within the category is likely to continue to expand as well. As a leader in its space, Wayfair has historically captured a disproportionate share of spend that has moved from physical retailers to online and should continue to do so.
Given these dynamics, W has suggested that it believes it can grow its revenues by 8x between now and 2030 to more than $100 billion, while generating EBITDA margins of more than 10% at maturity.
The most impressive part of Wayfair’s growth to date is the capital efficiency with which it was able to operate. Despite investing heavily in building out domestic fulfillment capabilities and international expansion, the company has largely been able to internally fund revenue growth of 15x since 2013, as evidenced by just 2.5x growth in diluted shares and its net cash balance sheet for most of the period.
The company carries only $50 million of inventory against its $14 billion of revenues. It gets paid by customers almost immediately, while waiting 40 days to pay its suppliers. It is one of the most (if not the most) important customer for its suppliers but has no material supplier concentration of its own.
Despite these dynamics, Wayfair currently sells for approximately 30x trailing free cash flow. Sure, FCF overstates economic earnings due to stock-based compensation and working capital dynamics. However, as the business scales, compensation will be leveraged and working capital will continue to be a source of funds.
In my view, the reason for the depressed valuation relative to a healthy long-term growth outlook for the business is the uncertainty regarding how much of the COVID benefit will reverse in the coming year or two. However, this year’s revenues will be insignificant to the long-term value of the business.
If anything, COVID has proven that W’s margins can scale with volume, something that skeptics previously questioned, and which is much more relevant to the long-term business value than whether near-term revenues will temporarily reverse or not.
Recently, the lead director of W purchased $13 million worth of stock in the open market. He has shown us with his wallet what he thinks of the current valuation. We agree with him.”
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Our calculations show that Wayfair Inc. (NYSE: W) does not belong in our list of the 30 Most Popular Stocks Among Hedge Funds. As of the end of the fourth quarter of 2020, Wayfair Inc. was in 40 hedge fund portfolios. KKR delivered a 4.91% return in the past 3 months.
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Disclosure: None. This article is originally published at Insider Monkey.
