W - Wayfair

[ScottHall]

Scott,

 

Citron's thesis on wayfair has been released. Thoughts?

 

http://www.citronresearch.com/wp-content/uploads/2015/08/wayfair-pre-final-d.pdf

 

I've been up all night, so here's my first impression... I thought this wasn't as good as the SeekingAlpha article posted previously. Relies a lot on superficial similarities to other businesses vs. reasons why Wayfair itself is a bad business. Agree with point on Amazon; that is my biggest concern, personally, as I've said since I posted this.

 

Supposedly Hedgeye will be releasing a 100+ page Powerpoint short thesis on Wayfair to its clients tomorrow, so I'll take a look at that if it's made public.

[Picasso]

I haven't had time to look into Wayfair (it's been on my list) but the table that Citron shows with their ROIC comparisons to AMZN, etc.... Seems like they have not adjusted for the negative working capital (especially in the case of AMZN).  The same could be said of W just from glancing at their balance sheet.

[Grenville]

One thing to look deeper into are the customer complaints. You can search online or just watch their twitter feed. There is a pattern to them. It's a bit worrisome when a business is trying to grow its brand and customer base. Maybe its just a handful of people, but my worry is its a larger issue.

[gurpaul88]

Q3

 

http://news.morningstar.com/all/ViewNews.aspx?article=/DJ/TDJNDN201511105588_univ.xml

[ScottHall]

What a gorgeous quarter. Market seems upset about guidance and/or Mr. Tilson but damn.

[gurpaul88]

Scott, any thoughts on Tilson's short thesis? TIA

[ScottHall]

Scott, any thoughts on Tilson's short thesis? TIA

 

Yeah, can you link me to the whole thing? I only know what I read in the articles about it, and it seemed very fluffy. I'd guess there's more to it, though.

[gurpaul88]

Sure,

 

http://seekingalpha.com/article/3670336-why-wayfair-is-my-largest-short-position

[Picasso]

Tilson is a cloner of short ideas, I'm assuming he's using Citron's.  That said he's been able to pick out some good shorts.

[ScottHall]

Sure,

 

http://seekingalpha.com/article/3670336-why-wayfair-is-my-largest-short-position

 

I'll reserve judgment until his Monday conference, but that analysis speaks for itself. I agree with the commenter who said his analysis consists of just personal anecdotes... I have some "personal anecdotes" about Mr. Tilson, too, which don't necessarily speak to his full set of skills as an investor. I'll refrain from discussing them because they're not relevant, just as most of the analysis presented in his SA article is not relevant.

 

The LL comparison is irrelevant, and as far as the economics of the business are concerned... the continually increasing number of repeat orders from customers is a pretty significant sore spot for the bear case. Now that the exact numbers are disclosed I have a hard time seeing the "low repeat rate" argument hold water. This quarter, to me, basically throws it out the window and makes me more confident that the ad spend is a shrewd investment.

 

The funny thing that many of the shorts use is that they're largely using comparable analysis to value the company, slapping on EV-to-sales ratios of other companies to show how overvalued Wayfair is. Tilson thinks Overstock is fairly prices at 0.2x EV/Sales, so Wayfair has 90% downside.

 

This is sort of amusing, because if you view that methodology as accurate, that means Wayfair is compounding its equity value at ~70% per year, or whatever its sales growth rate ends up being.

 

Take a company with $100 of sales. The "fair" valuation is 0.2x sales. So that company is worth $20. Now assume sales grow 70% to $170. Under that same methodology, the company is now worth $34, a 70% increase. Five years of that kind of growth and now you're at $1,419.86 of sales. And the company is worth $283 at 0.2x sales, giving you a positive return even if you bought at 2x sales.

 

I'm not saying that Wayfair will grow at that rate or that that line of thinking is even rational. I'm trying, as simply as possible, to show that it isn't. Growth is a major component of value and with Tilson's valuation methodology he's basically saying a company that is growing value at 70% per year is a short.

 

Yeah, okay.

 

In reality, that future growth should be accounted for in Wayfair's valuation, otherwise over any long time horizon (10+ years, say) obscene returns become a reality for equity holders. Yet, that seems to be what Tilson is arguing. If I accepted his methodology as valid I'd be backing up the truck.

 

But like I said, I'm going to wait until his conference on Monday to pass judgment on his analysis. It could be that he has a really good short case and is just saving it for his special presentation. What he's posted so far, though, is like a 4th grade-level value investor's analysis of a growth company.

 

EDIT: Changed "conference call" to "conference." Too much Ackman/VRX drama in the head.

[gurpaul88]

http://www.valuewalk.com/wp-content/uploads/2015/11/TilsonRH15.pdf

 

Tilson short argument starts at slide 38

[Jurgis]

Anecdotal:

 

We just ordered sofa on Wayfair. Good/great prices, large selection. Used 10%-off new client coupon, got rebate form for another $20. We'll see how the product is.

 

I doubt we will buy anything else from there soon though - we don't buy furniture often.

 

Also this does not tell if they are making any profit on the sale. :)

 

 

The losers on this? Neighborhood furniture store and BRK's Jordan's. Both had worse prices and worse selection.

[DCG]

Did you have to pay for shipping?

[Jurgis]

No. Free shipping.

[DCG]

That has to his their margins. How much does it cost to ship a sofa?

[Jurgis]

It hits either their margins or the margins of merchant actually selling the sofa, since AFAIK Wayfair just transfers the order to actual 3rd party merchants. AFAIK they don't fulfill the order themselves. I don't know who eats the cost of shipping/coupons/etc. Possibly it depends on their agreement with the merchant.

 

Will let you know when I get the order how it was shipped, whether it was fulfilled by Wayfair and what possible cost it was... :)

 

Looking at Wayfair 10Q, I see where ScottHall is coming from. I wouldn't buy the stock here - I can't predict how it's going to unfold. It could work out for bulls ... or for bears. ;)

[sternalot]

Wayfair is essentially a 3rd party distribution platform with an advertising program on crack. Wayfair has a network of 3rd party sellers that provide inventory data to populate the website. Wayfair is basically a broker with a snazzy website selling home furniture and products.

 

W will work because:

(1) There are network effects at play

(2) Eventually you leverage CACs

(3) Sellers like existing on a platform that prioritizes the products they produce (home products vs. AMZN medley of categories)

(4) AMZN can coexist with other online retailers because the customer prefers shopping at stores that specialize, even online.

 

W will not work because:

(1) Economically, a seller might be more inclined towards the economics of AMZN 3rd party selling vs. Wayfair's platform. AMZN said to take 10-15% cut vs. Wayfair gross margin of ~24%

(2) Repeat customers don't repeat into perpetuity, or they don't re-order frequently enough.

(3) They've already acquired the good customers.

(4) The threat of (1) and the trends of (2) & (3) could lead to elevated cash burn  -> share dilution or more debt

 

I have no position in this stock. However, I believe if this management team succeeds, it will be despite themselves. With that said, Tilson's short pitch is pretty bad caricature of what I believe to be the short thesis.

[ScottHall]

Wayfair is essentially a 3rd party distribution platform with an advertising program on crack. Wayfair has a network of 3rd party sellers that provide inventory data to populate the website. Wayfair is basically a broker with a snazzy website selling home furniture and products.

 

W will work because:

(1) There are network effects at play

(2) Eventually you leverage CACs

(3) Sellers like existing on a platform that prioritizes the products they produce (home products vs. AMZN medley of categories)

(4) AMZN can coexist with other online retailers because the customer prefers shopping at stores that specialize, even online.

 

W will not work because:

(1) Economically, a seller might be more inclined towards the economics of AMZN 3rd party selling vs. Wayfair's platform. AMZN said to take 10-15% cut vs. Wayfair gross margin of ~24%

(2) Repeat customers don't repeat into perpetuity, or they don't re-order frequently enough.

(3) They've already acquired the good customers.

(4) The threat of (1) and the trends of (2) & (3) could lead to elevated cash burn  -> share dilution or more debt

 

I have no position in this stock. However, I believe if this management team succeeds, it will be despite themselves. With that said, Tilson's short pitch is pretty bad caricature of what I believe to be the short thesis.

 

I agree with all of this except the comment regarding management, which I'd like to know more about. Have you had some dealings with them in the past?

[ScottHall]

http://www.valuewalk.com/wp-content/uploads/2015/11/TilsonRH15.pdf

 

Tilson short argument starts at slide 38

 

Having read this, my previous comments stand for the time being.

[giofranchi]

Hi Scott,

I keep seeing bearish articles about Wayfair… You have already made lots of money in Wayfair, and I know that just like me your portfolio is made of 15-20 companies that you like… Now let me ask: do you think it is worthwhile to hold a “battleground” stock? If you like Wayfair long term prospects very much, what’s the risk involved in watching from the sidelines for a while? At least until this bear raid is over? You might end up missing some of the upside… But you would still be able to reinvest later and catch most of the value Wayfair will create over the long term. Am I wrong?

 

Cheers,

 

Gio

 

[abyli]

Hi Scott,

I keep seeing bearish articles about Wayfair… You have already made lots of money in Wayfair, and I know that just like me your portfolio is made of 15-20 companies that you like… Now let me ask: do you think it is worthwhile to hold a “battleground” stock? If you like Wayfair long term prospects very much, what’s the risk involved in watching from the sidelines for a while? At least until this bear raid is over? You might end up missing some of the upside… But you still would be able to reinvest later and catch most of the value Wayfair will create over the long term. Am I wrong?

 

Cheers,

 

Gio

 

Gio:

I never understand why you need 15-20 companies. I tried to diversify into 3-4 positions, but lots of times I end up in diworsification. :-) As long as AAPL is cheap, I can keep adding it until it is 100% or 100%+ :-)

Bing

[ScottHall]

Hi Scott,

I keep seeing bearish articles about Wayfair… You have already made lots of money in Wayfair, and I know that just like me your portfolio is made of 15-20 companies that you like… Now let me ask: do you think it is worthwhile to hold a “battleground” stock? If you like Wayfair long term prospects very much, what’s the risk involved in watching from the sidelines for a while? At least until this bear raid is over? You might end up missing some of the upside… But you would still be able to reinvest later and catch most of the value Wayfair will create over the long term. Am I wrong?

 

Cheers,

 

Gio

 

Hi Gio,

 

Sure, interesting question. To be clear, I made a lot of money on Wayfair and lost most of it back; the stock currently sits in my account at an 8.3% gain.

 

Personally, I don't like to do short term trades and market timing for several reasons.

 

1. My employer places restrictions on the length of time I must own shares of any company I buy, and places restrictions on what companies I may buy and when.

 

2. I have very little confidence that I'll be able to correctly predict when sentiment on the stock will turn, if ever, and don't want to risk missing out on potential upside given that I won't need the invested capital any time soon.

 

3. I hate paying taxes, especially short term capital gains taxes, especially on companies that I would intend on buying back. It adds another layer of "losses" I'ldhave to make back for the short term trading to be economical.

 

Perhaps you've had more success with this strategy, but for me, I don't think it makes sense given my time horizon, tax status, confidence in my ability to time the market, and my inability to buy and sell shares freely.

 

Best wishes,

 

Scott

[giofranchi]

Gio:

I never understand why you need 15-20 companies. I tried to diversify into 3-4 positions, but lots of times I end up in diworsification. :-) As long as AAPL is cheap, I can keep adding it until it is 100% or 100%+ :-)

Bing

 

My idea is you might never truly know a business 100%, unless you sign all the checks. Period. In my businesses I sign all the checks every month. I’ll never be able to do so with a public company. Therefore, 15-20 companies are the result of “acknowledged ignorance” from me. At any time I usually can find more than 10 businesses I truly like… And although diversification will always end up in diworsification to some extent, I think that effect won’t be too pronounced.

 

Cheers,

 

Gio

 

[giofranchi]

2. I have very little confidence that I'll be able to correctly predict when sentiment on the stock will turn, if ever, and don't want to risk missing out on potential upside given that I won't need the invested capital any time soon.

 

I am not talking about “sentiment” alone… Usually, the bear have a thesis, and usually it is not easy to disprove it. What I was talking about is: are you able to disprove the thesis of the bear? If you think you are not, why won’t you consider simply waiting for the company to disprove it? If they do it convincingly, the stock price will certainly be higher by the time you’d be able to get back in… But if the company has a very long runway, you might still catch a lot of its upside, and the confidence in your investment will be much greater.

I understand, though, all your other points.

 

Cheers,

 

Gio

 

[sternalot]

Wayfair is essentially a 3rd party distribution platform with an advertising program on crack. Wayfair has a network of 3rd party sellers that provide inventory data to populate the website. Wayfair is basically a broker with a snazzy website selling home furniture and products.

 

W will work because:

(1) There are network effects at play

(2) Eventually you leverage CACs

(3) Sellers like existing on a platform that prioritizes the products they produce (home products vs. AMZN medley of categories)

(4) AMZN can coexist with other online retailers because the customer prefers shopping at stores that specialize, even online.

 

W will not work because:

(1) Economically, a seller might be more inclined towards the economics of AMZN 3rd party selling vs. Wayfair's platform. AMZN said to take 10-15% cut vs. Wayfair gross margin of ~24%

(2) Repeat customers don't repeat into perpetuity, or they don't re-order frequently enough.

(3) They've already acquired the good customers.

(4) The threat of (1) and the trends of (2) & (3) could lead to elevated cash burn  -> share dilution or more debt

 

I have no position in this stock. However, I believe if this management team succeeds, it will be despite themselves. With that said, Tilson's short pitch is pretty bad caricature of what I believe to be the short thesis.

 

I agree with all of this except the comment regarding management, which I'd like to know more about. Have you had some dealings with them in the past?

 

I met them during the roadshow. My biggest gripe is not their prior exploits, but how they are running this business today. I believe they are high on retail drugs, advertising, and the consequences are dangerous.

 

I will also contend a comment made earlier in this topic. Existing customers are not free. Sure, they may not have a negative contribution in subsequent orders, but I assure you that all those emails they send to new AND existing customers cost money. During my brief stint in retail, each email was about $0.01.