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NYSE: WJason A. Moser

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Few long-term trends pose the opportunity and potential that e-commerce poses today.

While a number of companies are making the shift from bricks-and-mortar to e-commerce (or some mix thereof), those that are built as e-commerce companies from the start have a unique advantage in claiming their share of the space.

Wayfair is one such company that is gaining share in a robust and growing market in home goods and furnishings.

The idea

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What does Wayfair do?

Wayfair is an e-commerce platform that sells furniture, décor, lighting,

kitchen, bed and bath, outdoor, home improvement, and baby and kids products to consumers under the

Wayfair.com, Joss & Main, AllModern, DwellStudio, and Birch Lane brands.

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What does Wayfair do?

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Market opportunity

$233BWayfair’s addressable home goods market (the US

furniture and home décor markets), was $233 billion in 2013, according to Euromonitor

International. It’s pegged to hit $297 billion by 2023.

70% In 2013 women represented 70% of Wayfair’s

customers. There are 63 million women between the ages of 35 and 65, Wayfair’s target demo.

73MThere are an estimated 73-80 million millennials (no

universal definition); about 25% of the US population today. Up-and-coming spenders…how do

they spend? How do they shop?

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A long-term trend

Source: US Census Bureau

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Management’s case:1. Differentiated: Home is shopped differently than

other retail verticals.2. More is better: Home shoppers desire

uniqueness, which requires vast selection.3. Easy does it: Time consuming and inconvenient

for consumers to shop across brick and mortar home retailers.

4. Compare and contrast: Difficult to browse, value shop and price compare.

5. Logistically speaking: Challenging logistics for consumers and retailers.

Why the home is different

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On management’s points:1. True, typically a much more personal purchase that is

dependent upon individual taste and preference.2. True, vast selection is definitely an advantage.3. True, it’s much easier to shop online than it is to drive

across town from store to store. However when it comes to furniture is the customer making this leap en masse?

4. True, to the aforementioned point, shopping, comparing, value-seeking much easier online.

5. True, often bigger-ticket items, often must be delivered, inventory management not as easy.

Is the home different?

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Management’s case:1. Service: Customer service is priority number one

with 30% of employees in CS division.2. Experience: Continued investment in mobile and

personalization offers excellent experience.3. Vast: Huge selection with more than 7,000

suppliers and 7 million products.4. Mutual: Wayfair opens up a large customer base

to a localized supplier base, suppliers benefit.5. Direct: Shipping directly from suppliers enhances

service, saves time, cuts down cost structure.

Why is Wayfair different?

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From the S-1:“Net revenue consists primarily of sales

of product from our sites and through the sites of our online retail partners and

includes related shipping fees. We deduct cash discounts, allowances, rewards

and estimated returns from gross revenue to determine net revenue.”

How do they make money?

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SalesOrders deliveredActive customersTTM revenue per active customerAverage order valueMargins

Wayfair metrics that matter

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Managing sales and margins

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The value of growing orders

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More customers, more sales

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ManagementNiraj Shah

Co-FounderCEO & Co-Chairman

Steve ConineCo-Founder

CTO & Co-Chairman

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ManagementMichael FleisherCFO since 2013

Former chairman & CEO of Gartner

James SavareseCOO since 2014

Joined Wayfair in 2008

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Going by the numbers presented, Wayfair held 0.4% of its defined market share in 2013 ($916 million in sales in a $233 billion market).

Initial analyst estimates peg Wayfair sales at $6.4 billion by 2019; CAGR of 37.5% for that 5 year time frame. Assuming these are optimistic, let’s take 75% of this estimate…$4.8 billion and 30%.

Cut that growth rate in half for 2020-2023, Wayfair sales in 2023 are $8.4 billion.

Based on market estimates of $297 billion this would give Wayfair about 2.8% market share by 2023. Reasonable? Sure.

Stock trades at 1.93X sales today; Amazon trades at 1.75X sales; eBay 3.75X sales; Google 5.7X sales. Amazon is its most sensible comparable.

If Wayfair hits sales of $4.8 billion in 2019, at 1.75X sales we have a market cap of $8.4 billion up from $2.14 billion today.

But what’s happening to margins along the way? That’s the big question.

Understanding future worth

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Suppliers: Relationships with suppliers are crucial but easily terminable. Any large exodus could prove debilitating to the model.

Amazon.com: Tremendously competitive space, not just Amazon either. Sensitivity: No doubt Wayfair and its brands are subject to an

economically sensitive consumer. Founders: While I’m very encouraged by the co-founders being so

intimately involved with the business, any infighting or departure of one or both would be a red flag.

Service: Reliance on suppliers for effective inventory management and/or shipping could result in poor customer service.

Go long: This is a growth story and a company that will be investing a lot in its operations in the coming years.

Duality: Dual-class share system places power in the hands of the founders. They’re calling the shots, like it or not.

Risks

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Furniture Stores

Big Box Retail

Specialty and Online

Competition

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E-commerce presents a host of investing opportunities as a long-term trend that is still in the very early innings.

The first question to ask of any retail play, e-commerce or otherwise is: How will it compete with Amazon.com? Could this be an Amazon acquisition target? Why? Why not?

Founder leadership is a very attractive quality in Wayfair’s business, but remember it’s not a thesis.

Wayfair’s relationship with its suppliers is an integral part of its business model.

It’s too early to definitively call Wayfair a buy, however the stock’s pullback should put it on the radar for investors who are willing to be patient.

Points of discussion

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Remember, investing is all about the future. There are

never any guarantees and you're taking a measure of a leap of faith

every single time.