InvestorPlace - Stock Market News, Stock Advice & Trading Tips
From one perspective, Wayfair (NYSE: W ) is being treated like most tech stocks. Wayfair stock has a market capitalization of nearly $14 billion despite the fact that Wayfair is unprofitable, even on an adjusted EBITDA basis.
From another perspective, however, Wayfair stock price might be considered cheap: its price-sales multiple of two is among the lowest of all 'tech' stocks.
The argument over Wayfair stock price, then, seems to come down to whether it truly is a "tech" stock. Certainly, the company's online business model seems to suggest that it is.
But, at the end of the day, there's also an argument that Wayfair is simply a furniture company that sells its products online. If that's the case, then W stock might be significantly overvalued because furniture companies are not getting much credit in this market.
The Cyclical Problem Facing W Stock
One of the more favorable aspects of many newer tech stocks with high valuations is that their exposure to economic cycles shouldn't be that severe. The revenue of a " software-as-a-service stock " like Salesforce.com (NYSE: CRM ), for instance, should stay reasonably steady even as the economy ebbs and flows.
A company might cut a few SaaS licenses if it lays off sales staff. But customers of Salesforce.com or Workday (NASDAQ: WDAY ) or even the cloud unit of Amazon.com (NASDAQ: AMZN ) aren't going to end their contracts in the middle of a recession.
Even some consumer plays - think Netflix (NASDAQ: NFLX ) or Spotify (NYSE: SPOT ) - should be similarly resilient. As Josh Enomoto pointed out late last year, Netflix might even be counter-cyclical; consumers might eliminate their more expensive cable subscriptions, accelerating the shift to Netflix's streaming services.
That is clearly not the case with Wayfair. The furniture business in particular is enormously cyclical. So, too, are many of the company's other key categories, like decor and appliances. And the obvious risk facing Wayfair stock is that the U.S. is in the tenth year of an economic expansion. Wayfair's growth has been impressive over that stretch, but what happens when the economy inevitably slows down?
Should the Wayfair Stock Price Be This High?
The price of Wayfair stock might not seem like a concern right now, particularly as stock markets look poised to re-take their all-time highs. But the fact is that other similar, albeit mostly brick-and-mortar, companies, already are pricing in the risk of a recession.
Most furniture retailers and manufacturers trade in the range of 10 times to 12 times their earnings. La-Z-Boy (NYSE: LZB ) might be the most expensive of the group; backing out net cash, it trades at about 14 tines its earnings, as does volatile RH (NYSE: RH ).
Home-decor retailers have been hammered. Bed Bath & Beyond (NASDAQ: BBBY ), Tuesday Morning (NASDAQ: TUES ), and Pier 1 Imports (NYSE: PIR ) all are struggling. Williams-Sonoma (NYSE: WSM ) is holding up better, but it still has traded sideways for over three years now.
Cyclical fears aren't the only factor holding many of those stocks down. In fact, they likely aren't the biggest factor behind their weakness. Wayfair's impressive top-line growth, and share gains by Amazon and other online retailers, are key reasons why stocks in the furniture-retail sector have struggled. But even growing companies like RH and La-Z-Boy are being valued cheaply.
And taking a broader look, most cyclicals - auto manufacturers, boating plays, equipment stocks like Caterpillar (NYSE: CAT ) - are being valued as if the end of the cycle is closer than the beginning. A decade into an upcycle, that's not surprising. What is surprising, perhaps, is that W stock doesn't seem to be getting the same treatment.
Be Careful Out There
The core argument around Wayfair stock really comes down to whether Wayfair's market is viable. Its revenue growth has been impressive,. But those who are bearish on Wayfair stock argue that the company's higher sales simply are being purchased by huge advertising costs and free shipping.
The jury's still out on that debate. But the cyclical aspect of the business has to be a concern. When the economy turns, Wayfair likely is going to take a hit. That, in turn, means it has to convince investors of the validity of its business model before that happens.
If the market thinks Wayfair will be a dominant retailer for decades to come, Wayfair stock can ride out temporary weakness by the company. If the battle over Wayfair's outlook is still raging, and the economy turns south, however, W stock is going to plummet.
As of this writing, Vince Martin has no positions in any securities mentioned.
More From InvestorPlaceCompare Brokers
The post The One Big Catch With Wayfair Stock appeared first on InvestorPlace .