Mad Hedge Technology Alerts!
Avoid online furniture e-store Wayfair (W) – it’s too expensive.
That was my conclusion after going over the company’s data with a fine-tooth comb.
The stock is up over 600% over the past 5 years, it’s certainly a performance of a rock star in retrospect but it is far from a guaranteed indicator of future success by any means.
Shares have outgained the broader market by a wide margin resulting from January’s snapback in oversold territory scorching skyward 22% compared to an 8% spike in the S&P 500.
Investors must look at the performance of the company and deduce if the path forward is littered with booby traps or if it is as smooth as a slab of granite.
I would argue the former.
Just because the company is in e-commerce doesn’t mean it gets a free pass.
When you hear the word e-commerce, the mind darts and dives to the success of Amazon (AMZN) and observers must assume that if it’s doing the same job as Amazon, cash must be falling from the sky.
Well, the truth is sometimes harsh, and unfortunately, this company is nothing close to Amazon.
Wayfair sells furniture, a tough business from the onset.
Investors must ask themselves - does Wayfair optimally sell furniture and run its company efficiently?
First, the good.
Sales have gone gangbusters the past few years and this is the catalyst driving the stock northwards.
The company presided over a 3-year sales growth rate of 44% - impressive for a cloud company, let alone an online furniture company.
In the past 3 years, the company has more than doubled sales from $2.25 billion in 2015.
Noticeably, tech growth investors have piled into this name propping it up irrespective of any problems behind the lipstick.
The knock on Wayfair is not the amount of growth but the net quality of growth.
These two must be differentiated and have ramifications affecting the firm’s ability to nurture return business down the road.
Take a quick spin on their official website by clicking here.
Right away, before the user can even take a glance at what the website has to offer, the company is vigorously fishing for an email address to allow the reader to continue.
Without entering an email, the prospective customer is stopped dead in its tracks clicking out of the website – too aggressive for my taste.
Why hand over a personal email when any Amazon prime user can just migrate to Amazon’s search bar without all these hoops that need to be jumped through?
The subsequent message attached to the email signup form says, “Up to 70% off Every Day - Shop every style of furniture and décor at up to 70% OFF. - Exclusive sales start daily.”
If you finally decide the site is worth your time and want to insert your email to move forward pass the first barrier, almost every inch of the site is peppered with over excessive 70% sales reminders.
Don’t forget the first pop-up described the same thing – and now it’s sales promotion overload.
This aggressive marketing push reminds me of a company who knows they cannot compete long-term and believes a marketing solution is the elixir to all of its ills.
Wayfair has performed admirably at growing sales the past few years, and that cannot be taken away.
But its sales success has been carried out in an over-reaching way with respect to the health of the company.
Effectively, Wayfair has been sacrificing margin and burning cash at a high rate potentially disenfranchising its shareholder base in the near future.
This will end in tears.
I cannot envision a scenario where this same business model perpetuates due to a lack of a differentiated advantage.
They do nothing more than the next guy does.
The more I use the website, the more I want to revert back to Amazon and buy furniture from Jeff Bezos.
The situation echoes the current situation with low-cost airlines Wow Airlines from Iceland and Norwegian Air Shuttle (NWARF) who doubled down on the same type of strategy that took them to the brink of solvency.
Wayfair’s advertising and marketing expenses have been growing 30-40% per year along with customer service expenses.
Net income has gotten clobbered during this time span as well.
Wayfair lost less than $50 million in 2015. The losses have racked up to almost $450 million at the beginning of 2019.
As quarterly EPS has cratered, Wayfair has missed the past 4 quarterly EPS forecasts demonstrating a continuous lack of execution from management and an inferior strategy.
The EPS percentage change on a sequential basis was negative 97% last quarter.
This company will end up as a pump-and-dump stock, and I speculate no viable path forward to profitability unless major surgery is done to this business model.
I highly doubt that Wayfair can consistently maintain mid-40% sales expansion, and if it does, it is only a matter of time until the ripcord is pulled and the pilots abort the plane before it crashes into the ocean.
As soon as this turns sour, whether it be a recession or the sales strategy becomes impotent, shares will face Armageddon.
Ultimately, the risk/reward proposition is poor, but that doesn’t mean this stock can’t rally a further 30% on the back of a dovish Fed and kick the can down the road trade deal.
If they can clock in mid-40% sales growth, it doesn’t matter if they slaughter net income and expenses because growth investors will come out the woodwork to buttress this online furniture store.
Stay away from this high-risk company.
This is almost a tale of the emperor's new clothes.
Mad Hedge Technology Letter
February 12, 2019
Fiat Lux
Featured Trade:
(MEET YOUR HOME OF THE FUTURE),
(KASITA),
(PLEASE SIGN UP NOW FOR MY FREE TEXT ALERT SERVICE NOW)
Enter the home of the future – the iPhone of housing fused with Swedish furniture maker Ikea.
It is a progressive way to live lightly in 352 feet of space for a final bill of $139,000 or rent the space for a sum substantially lower than today’s market rates.
Sounds too good to be true?
If you look at houses now, technology is an afterthought and with the explosion of new architectural techniques and a smorgasbord of IoT products available now – why should it be?
Kasita is an Austin, Texas-based company attempting to transform housing options with one revolutionary product.
Aptly named Kasita after the company that constructs the product, this house is a rendition of a tiny home but fitted with high-end finishes and layered with all the newest tech gadgets.
The firm isn’t competing against the stereotypical urban high-rise or single-family home.
They are targeting the areas of opportunity in between.
On the software side of things, over 60 integrated IoT products deployed together provide a cozy and clutter-free experience resulting in the Marie Kondo of tiny homes.
The team has built in-house software that bridges the IoT products working together simultaneously in one cohesive manner.
Gradually, Kasita hopes to produce one microunit every 57 seconds under one roof.
The first finished units were installed in backyards in Austin and were a resounding success and that was just the beginning.
Aiming to go ultra-dense long-term will make this company and its products sustainable.
The ultimate vision entails building microunits on small parcels of lands then building vertically whether it be 10 or 100 stories high.
The vertical construction would be possible with a rack structure enabling kasita units to be interchangeably installed into the rack structure.
Think about it as an RV park that pays for each slot, but the rack structure would allow building to commence upward minimizing the allotment of required land maximizing resources.
Theoretically, since these units will be interchangeable, CEO Jeff Wilson envisions being able to transport units to other vertical racks with the ability to slot one in seamlessly.
Effectively, dwellers would no longer be bound to the land they resided on and would be able to transport a kasita unit anywhere in the world.
This company wants to remake the concept of manufacturing houses into a process that echoes the automobile or smartphone production method.
Designing the kasita from the ground up took over 5,000 man-hours of precise engineering by BMW-experienced engineers.
They borrowed the blueprint of making a finely tuned German car and instilled many elements into the kasita allowing them to build a beautiful and modern micro home.
The design has natural light, high ceilings, clean surfaces which adds up to making this space feel larger than it actually is.
Also, by designing extra high ceilings, it created additional functions such as sliding a bed underneath for pull-out as well as positioning parts of the house together without wasting space.
During the meticulous research process, engineers found they could enlarge the house by about 25% because of the space-saving methods.
The design avoids wood and is made on a production line like a model T.
Migrating to an assembly line production method able to realize the efficiency of scale will suppress manufacturing costs resulting in a profitable enterprise.
Solving the acute housing crisis on the two coasts is an imminent threat to American social stability.
Pockets of friction can be spotted all over the Golden State and educators in California are fed up with the status quo with rents rising faster than inflation and wages.
Sara Kimberlin, senior policy analyst at the California Budget & Policy Center, recently chimed in saying, “In every part of California, housing is unaffordable for many people.”
The urban districts closest to San Francisco and Los Angeles are the epicenters of housing unaffordability.
A recent strike of thousands of teachers in the Los Angeles Unified School District magnified the dire situation at hand.
A small one-bedroom flat is $2,000 to $3,000 per month in Los Angeles and rises to $4,000 in parts of San Francisco, equivalent to a teacher's take-home pay for one month.
Using small parcels of lands to deploy these small microunits would not entail applying for special permits for these urban spaces.
These two urban centers would relish more housing reply and could use plots of lands that currently occupy errant garbage dumpsters or space too small to develop on.
Realistically, the economics spearheading this project would gravitate towards the level of affordability to drop to the point where a person working in a fast food restaurant or as a house cleaner could afford the monthly cost of living inside of one.
At this point, suburban-type houses have been shunned by the younger generations.
Young people desire an experiential life that includes living on less but still with premium access to creative arteries in dense urban districts.
But there isn’t enough space for housing.
Clearly, this isn’t a home for a family of 5, but recent converging trends signal this is the clear-cut direction society, housing, and the economy is headed whether we love it or hate it.
The company first started selling in Texas and has recently branched off into California, and Nevada.
Will this ultimately fix the housing crisis in California?
No, but it could give single workers more options if they have a job that forces them to move around every few months and are tech savvy.
To view their official design, please click here.
