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Wayfair Stock Rose despite Stifel’s Rating Downgrade

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Apr. 28 2020, Published 1:06 p.m. ET

Wayfair (NYSE:W) stock rose 5.2% on April 27 despite Stifel’s rating downgrade. Notably, Stifel lowered Wayfair’s rating to “hold” from “buy.” According to Stifel’s analysts, Wayfair stock has already crossed the target price of $115, which they assigned last week. The stock has risen over 400% compared to its low on March 19.

Customers have to stay home due to lockdowns amid the COVID-19 pandemic. Wayfair and other online players benefit from increased online shopping. Wayfair’s extensive merchandise assortment and quick delivery have helped it meet the spike in demand. Recently, the company provided a positive business update.

However, certain analysts think that the surge in online orders might be temporary. Many rival retailers might reopen stores soon. Various states have been discussing plans to reopen the economy. Also, consumer spending on discretionary items might decline amid rising unemployment.

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Will Wayfair post impressive Q1 results?

Wayfair will likely report its first-quarter results on May 5. In the business update provided on April 6, the company indicated that it’s optimistic about meeting or exceeding its first-quarter guidance. The company predicted first-quarter revenue growth of 15%–17%. Meanwhile, the adjusted EBITDA margin guidance range was -7.3% to -7.8% for the first quarter.

Wayfair is optimistic about its first-quarter results due to the strong growth rates that it experienced amid the COVID-19 outbreak. The company’s gross revenue growth was slightly below 20% year-over-year in January, February, and early March. However, the revenue growth rate more than doubled towards the end of March as COVID-19 restrictions emerged. According to Wayfair, the strong run-rate continued in April.

Analysts expect the company’s first-quarter revenue to grow 18.4% to $2.30 billion. They expect the adjusted loss per share to widen to $2.60 in the first quarter of 2020 compared to an adjusted loss per share of $1.62 in the first quarter of 2019.

Challenges ahead

Wayfair hasn’t turned profitable yet. The company, which went public in 2014, continues to face huge competition from department stores and big-box retailers like Lowe’s and Home Depot (NYSE:HD) as well as other larger online retailers like Amazon.

Wayfair incurs huge advertising expenses to create visibility in a highly competitive market. A higher headcount and investments in international expansion have also been hurting the company’s bottom line. Wayfair’s reported net loss increased significantly to $10.68 per share in 2019 compared to $5.63 in 2018. The losses widened despite 34.6% revenue growth. The company is taking several steps to improve its profitability, including headcount reduction.

Wayfair stock has risen 42.5% year-to-date as of April 27. Among the analysts following the stock, 13 recommend a “buy,” 13 recommend a “hold,” and six recommend a “sell.” Currently, the average 12-month target price of $80.79 for the stock indicates a potential downside of 37%.

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