Wayfair's Near-Term Recovery 'Not In Sight,' Morgan Stanley Says In Downgrade

Morgan Stanley turned bearish on online furniture retailer Wayfair Inc W as any signs of a turnaround are "not in sight."

The Wayfair Analyst

Simeon Gutman downgraded Wayfair from Equal-Weight to Underweight with a price target lowered from $75 to $65.

The Wayfair Thesis

Investor sentiment is calling for Wayfair to show a stabilization of revenue trends in 2020 while also demonstrating a quick path to profitability than expected, Gutman wrote in the note. However, Morgan Stanley's first-hand checks point to an ongoing deceleration of revenue growth and rising macro headwinds.

Specifically, Wayfair started off 2019 with a 40% revenue growth rate but likely exited the year at less than 25% based on conversations with suppliers. The analyst said the slowdown in sales is broad-based and not exclusive to Chinese-made products impacted by tariffs.

Meanwhile, Gutman says Wayfair has among the biggest exposure to China and the coronavirus as around 80% of its cost of goods sold (COGS) are sourced from China. As such, the company could face "significant disruption" to its supply chain if the virus continues to impact manufacturing. Under a worst-case scenario, Wayfair could face "widespread out-of-stocks" at a time when the market is expected a re-acceleration of growth.

Finally, total advertising spending in the U.S. is expected to grow by 7% in 2020 as all companies look to take advantage of the Summer Olympics and U.S. Presidential election. In Wayfair's case, the company could end p with a return on investment short of expectations due to high ad costs.

W Price Action

Shares of Wayfair were trading lower by 6% to $75.40 at time of publication.

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