Why 2018 Could Be This Stock's Best Year Yet

Wayfair (NYSE: W) shareholders have had an exciting year so far, with the stock having traded down by as much as 25% in the spring before the momentum flipped into major gains over the past three months.

There's every reason to expect continued volatility as the e-commerce retailer pairs market-thumping sales growth with mounting losses. Yet the business is showing signs of strength that should support healthy profitability over time while adding weight to investors' bullish thesis.

A grip on market share

Wayfair operates in the home furnishings segment of the online retailing space, which has at least two major tailwinds. First, the niche has a lower penetration rate than categories like electronics and apparel, and so there's a longer runway for growth as consumers warm up to the idea of buying their furnishings online, as they already do for many other product categories. Second, the segment has attractive demographics, with a wave of millennials entering the niche, promising to keep demand rising for years.

The company's last few quarters support that bullish outlook. Sales growth sped up in the fiscal first quarter following its blowout holiday season. The company most recently notched another quarter of nearly 50% sales gains as its pool of active customers reached 12.8 million, up from 9.6 million a year earlier. That growth rate blows away its traditional retailing peers and is also far faster than the latest numbers from established online giants like Amazon and Walmart.

Fending off the competition

The retailer has achieved that growth despite aggressive competition from rivals like Overstock, which slashed prices earlier this year in an effort to halt Wayfair's momentum. Overstock recently abandoned that strategy when it failed to catch on. Not only did Wayfair continue grabbing market share in the first half of the year, but it also kept its prices steady and allocated about the same amount of resources toward marketing as it has in recent quarters. Those successes imply that the company's market-share wins have more to do with core competitive strengths like branding, scale, and customer satisfaction, than simply cutthroat pricing.

CEO Niraj Shah and his team believe their long-term growth prospects hinge on their ability to improve the customer shopping experience. So the company is pouring resources into initiatives like building out its own shipping infrastructure, in addition to the more software-focused moves that you'd expect from an online retailer. Management can point to a few metrics that signal progress here, including a rising proportion of repeat buyers, faster delivery times, and a proven ability to extend into new product categories like bathroom vanities.

Risks to the outlook

Its growth priorities have kept the company posting modest losses in its more-mature U.S. segment even as the international division sheds cash while it ramps up. Wayfair is on a hiring binge right now, too, and that has pushed selling expenses higher. Altogether, the progress it's making toward bottom-line profitably seems at least a year out, given that net losses have doubled over the past six months to over $200 million, compared to $95 million in the year-ago period.

Yet the bigger picture syncs up with the growth plan that management has been telling shareholders about for over a year. Wayfair is strengthening its hold on the industry, building a large base of customers, and establishing itself as one of the segment's biggest players. It's not hard to see how those successes could allow costs to eventually fall as a percentage of the overall sales base. That win should deliver progress toward Wayfair's long-term goal of adjusted profitability between 8% to 10%, compared with the 2% loss that the retailer posted in the most recent quarter.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Demitrios Kalogeropoulos owns shares of Amazon. The Motley Fool owns shares of and recommends Amazon and Wayfair. The Motley Fool has a disclosure policy.