Be Patient On Wayfair: JPMorgan Sets $45 Price Target

J.P. Morgan’s Christopher Horvers expressed concern regarding Wayfair Inc’s W stock valuation due to decelerating sales growth and increased spending, as well as the beginning of a historically seasonally weak period for stock in general.

The analyst initiated coverage of Wayfair with a Neutral rating and price target of $45.

Value Proposition

“W’s value proposition is an “endless aisle” of 7MM decorative SKUs from 7K vendors via a visually-inspiring web experience and proprietary IT platform,” Horvers stated, while adding, “Besides exposure to the faster growing online segment, W’s sweet spot is the healthy mass customer.”

During 2015, the company witnessed acceleration, with retail revenues growing 85 percent, driven by effective advertising, seasonal merchandise expansion and macro factors.

Decelerating Sales

However, following the successful holiday season, the company’s guidance and comScore data indicate a deceleration in sales trends.

According to the J.P. Morgan report, “Deceleration on a stock valued on revenue growth is tough, while investments should pressure margins and cash flow.”

Wayfair sees high visibility into its operating expense leverage and gross margin, although customer retention could be an obstacle to achieving its long term margin target, due to the company’s high variable cost model.