Citi Downgrades Wayfair: 'Heavy 2016 Investments Push Us To the Sidelines'

Wayfair Inc W reported better-than-anticipated results for 1Q16. Citi’s Mark May downgraded the rating for the company from Buy to Neutral, while reducing the price target from $51 to $45. The analyst expressed concern regarding pressure on Wayfair’s margins from the heavy investments planned for 2016.

Another Revenue Beat

Wayfair reported its 1Q16 Direct Retail revenue at $747mn, representing 93 percent growth, and beating the Citi estimate of $697.3mn. Majority of the upside was driven by average order value, which grew 16 percent y/y to $238, 8 percent higher than the Citi estimate.

Gross margin came in at 24.0 percent, 12bps above the estimate. The company reported an adj. EBITDA loss of $21.0mn, lower than the Citi estimate of a loss of $21.7mn, analyst Mark May noted.

Moving To The Sidelines

Following the results, Wayfair’s shares surged 10 percent. May said that since investors are looking for Wayfair to generate EBITDA improvement. Therefore, although the company’s solid top-line results may support shares in the interim, EBITDA expansion was required for an outperformance.

Wayfair is achieving margin improvement in its domestic business. The analyst added, however, that “international investments and aggressive hiring at both home and abroad are likely to stymie significant consolidated EBITDA upside in 2016.”