Can Wayfair Stock Bounce Back After Last Week's 19% Drop?

By Markets Fool.com

Image source: Wayfair.

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Sometimes top-line growth isn't enough. Shares of Wayfair (NYSE: W) -- one of last year's biggest winners -- shed nearly a fifth of their value last week after the company posted quarterly results that triggered a couple of analyst downgrades.

The results reported Aug. 9 may seem impressive at first glance. Net revenue soared 60% to $786.9 million, fueled entirely by a 72% surge in direct retail revenue from its five primary online brands. It's in the process of ramping down its fading retail partner business. That's heady growth for the internet-based retailer of furniture, but it's actually Wayfair's weakest growth since the first quarter of last year, according toS&P Global Market Intelligencedata.

Profitability has been a challenge for Wayfair. It continues to post red ink. That hasn't been a dealbreaker in the past. It didn't stop the stock from soaring 140% last year, its first full year as a public company. However, the loss of $48.3 million for the second quarter is its steepest deficit since the holiday quarter of 2014. Wayfair has now posted back-to-back quarters where its adjusted bottom-line results fail to live up to Wall Street expectations, and that's why some analysts cooled on the stock last week.

Bank of America/Merrill Lynch analyst Justin Post downgraded the stock to neutral, lowering his price target from $54 to $45. He finds the trends of decelerating revenue growth and contracting margins troublesome. Goldman Sachs' Matthew Fassler also lowered his rating on Wayfair stock to neutral, fearing the e-tailer's goal of posting breakeven EBITDA for this year's holiday quarter seems aggressive.Piper Jaffray analyst Neely Tamminga countered that the sell-off following the quarterly report represents a buying opportunity, but that clearly wasn't the consensus among analysts and investors last week.

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Wayfair has established itself as the undisputed leader in online furniture, claiming to account for as much as 40% of the stateside market in its primary online categories.There are now 6.7 million active customers, 65% more than a year earlier.

More of its orders are coming from repeat customers, and they are spending more per capita. Net revenue per active customer over the past 12 months has climbed 13% to $404. There was a time when bears feared that folks would be hesitant to purchase bulky and big-ticket furniture pieces online, sight unseen, but that thesis has clearly been crushed. There was also the concern -- as consumer usage shifted from PCs to mobile -- that furniture e-commerce would be a hard sell on small smartphones, but more than 38% of the orders Wayfair is receiving these days are being placed by mobile devices.

Wayfair is setting itself up for even bigger growth. Its warehouse space across various facilities has tripled to 3 million square feet this year as it hopes to lure more suppliers to lean on its improving platform for fulfillment logistics.

It's been a wild run for Wayfair in its brief tenure as a public company. The IPO was priced at $29 in late 2014, only to close out the year in the high teens. That set the stage for last year's monster 140% pop as growth accelerated, but last week's drop now finds the stock in a hole for 2016.

Wayfair is in a good place. It appears to have cracked the code in terms of getting folks to rely on e-commerce for furnishings. Baking free shipping into its prices helps, but now investors will need improving margins to get the stock back on track.

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Rick Munarriz has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Wayfair. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.