Trader Talk

Online retailer Wayfair soars in market debut

Wayfair co-chairman and co-founders Steve Conine (C) and Niraj Shah applaud as they ring the opening bell above the floor of the New York Stock Exchange on the day of the company's IPO October 2, 2014.
Lucas Jackson | Reuters

The surprise IPO: Wayfair (W).

I review the week's IPOs every Friday, and usually get calls or comments from IPO traders about what will be hot...or not...this week.

Online retailer Wayfair was a surprise. Not expecting a big pop, but that's what we got. Price talk was $25-$28, opened at $29, closed at $37.72, up 30 percent.

Huh? For selling home furnishings? And for a company that doesn't make any profits?

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Here's the trick: Even though the company doesn't make money, it is increasing revenues. At about 35 percent a year.

Bingo. Remember the mantra: In a world starved for growth, investors will pay up for it. And for big growth, like 35 percent a year, they will pay up big.

That's not the only good news. This company wants to be the leader in selling home products to millennials. It runs bright, splashy ads with good-looking people looking comfy and happy in the home. Brand loyalty seems high.

Here's the bad news: 1) The barriers to entry are very low, 2) Wayfair is spending enormous amounts of money in sales and marketing and will be for years, 3) there are two classes of stock (the class of stock it is selling has limited voting rights, the insiders have a special class of stock that gives them special voting rights), and 4) Wayfair is the leader in a fragmented market. According to Renaissance Capital, Wayfair has a six percent share of the online e-commerce home market. The e-commerce market itself is only 7 percent of all home goods sales itself. Do the math.

Will Wayfair ever make money? Renaissance sees the company with operating profit some time in 2017....but along the way there is an awful lot of spending. And losses.

That's not bothering investors so far. We don't care about earnings, we just care about market share.

Sound like 2000? But this time, it's different. So they say.