WAYFAIR PART II: THE PRICE IS WRONG … or … THE DILEMMA OF PROFIT
BY DAN VALENTI
PLANET VALENTI NEWS AND COMMENTARY
(FORTRESS OF SOLITUDE, MONDAY JAN. 21, 2019) — On Oct. 17, 2017, the New York Times ran a prophetic piece on an online furniture and home-goods company. The article questioned how it would be possible for the firm, Wayfair, to compete given its razor-thin profit margins in an uber-competitive market. The piece concluded with an implied prediction that sustainable profitability would be unlikely. It said Wayfair’s niche business model of delivering bulky items from manufacture-to-warehouse-to-customer would not generate sufficient profits and noted that customers, before they buy big-ticket items such as a sofa or bed, like to physically examine and test the product.
The Times also said Wall Street loved to sell Wayfair stock short. In selling short, the buyer bets shares will drop in value by a specified date. Stocks that draw short sellers raise red flags for traditional investors, since they indicate companies losing money and not a good risk.
The article says if the business model can’t produce sufficient profits for the company, the owners will look to the stock for their gains. You don’t need Sherlock Holmes or Dr. Charles Trzcinka to point out the ensuing dilemma for Wayfair: One the one hand, your business model loses money ($151.7 million losses in 3rd Q 2018). On the other hand, you need to make your killing with share price. But how can stock prices show the requisite gains if the company keeps losing money?
Enter temptation.
One way around the pickle is to illegally inflate the stock price. That’s what the lawsuit alleges filed against Wayfair last week in federal court in Boston. It asserts the company lied to analysts and investors to drive up the price. It does seem odd in the extreme that Wayfair stock, which on Aug. 1, 2018 stood at $107 a share, should by mid-September magically rise to $150, a 71.3% gain — while the company was losing more than $10.6 million a day. The suit alleges that when Wayfair peaked at $150, the company’s insiders cashed out, criminally pocketing $87.75 million and burning honest investors.
This is the company mayor Linda Tyer bragged about when she announced Wayfair would build a satellite operation in Pittsfield employing 300. The move, now in serious jeopardy, would be an expansion of the Boston-based business throughout the Commonwealth boosted by public money. Stop us if you’ve heard this one before.
Reminds THE PLANET of the Beacon Cinema fiasco:
- From 2008 to 2018, pump in $30 million of mostly public money
- Run it unprofitably for 10 years
- Let the building deteriorate
- Sell it to “friendly interests” for two cents on the dollar
- Walk away from almost $3 million owed to taxpayers, with Tyer’s blessing
- Book town with no accounting of where the $30 million went.
Repeat after me: There were no kickbacks. There were no kickbacks. There were no kickbacks.
———- ooo ———-
THE PLANET was amused by the reaction to our weekend piece on Wayfair. We reprinted the mayor’s now-immortal quote that federal lawsuits happen all the time as a routine cost of doing business. Most people couldn’t believe she actually said that.
Yeah, she did.
The mayor’s defenders, including her inner circle, blasted us, doubling down on the preposterous claim that major lawsuits happen every day to companies all over America.
Honey, if that were the case, there would BE no America.
One mayoral defender scolded us that 412 lawsuits were filed against companies in 2018. We inconveniently pointed out that America has roughly 6 million companies, public and private, producing a litigation rate of 0.000068%, meaning that 99.99932% of the firms did not face federal, class-action litigation — hardly the “it happens all the time” that Tyer and the band proclaim.
Like the loser in a chess match stubbornly insisting on playing a lost position, the Kool-Aid drinkers said the 412 were from the universe of only publicly traded companies, citing the figure of 5,000 such firms in the nation. That would still yield a 92% safety factor for these companies. However, the drinkers conveniently left out all the companies that are publicly traded — not just those on the major exchanges. There are 15,000 such organizations. In other words, using this metric, nearly 98% of companies were NOT sued, again, hardly a routine event.
———- 000 ———-
When you get this kind of push back, you see smoke. And where there’s smoke, there’s usually flames from the ninth circle.
Here’s a question given the dates of the alleged stock fraud.
Did anyone from the city, either in government or elsewhere, receive inside information? Did anyone purchase stock on or before Aug. 1 last year and sell on or near mid-September? THE PLANET doesn’t make that claim, but given that Pittsfield and Wayfair were in negotiations during or near that time frame, it’s a fair question. Will key city officials answer on the record: Did any official or anyone else with inside information profit from the alleged hoax?
The court proceedings will play out. Wayfair might win acquittal, be found guilty, or the case will be dismissed. Time, as always, becomes the most reliable messenger.
“Pull down thy vanity” — Ezra Pound.
“OPEN THE WINDOW, AUNT MILLIE.”
LOVE TO ALL.
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Remember the first fence they put around Pontoosac Lake. Didn’t they have to build another one because the first one obstructed the view of the Lake, is that true?
Carl your correct
Unwanted Carl,
Yes, they did rebuild the fence around Pontoosac Lake because everyone complained the view of the lake was obstructed. But in fairness, no one bothered to attend any of the information meetings that discussed the proposal before it was built. So to the cost of over a $1million, and because of initial apathy, the taxpayers had to foot the cost of rebuilding. Perhaps folks would be served to pay better attention when things are proposed.
Hey,Art. Yeah, someone was telling me that. We were talking about Pittsfield debocles and she mentioned that one, I wasn’t around then. Two others that topped her list was millions gone and consent decree.
Carl. I think millions gone pertains to beacon and consent decree is a set of standards established by the EPA that a municipality must meet. The millions gone could also possibly be the swan song of Metcalf and eddy engineers when the Gman stole their 150 million dollar pot of gold in the 80’s
Great
Since my name showed up in your text, let me chime in. Federal lawsuits are not exactly rare but each needs to be examined if there is any commitment of money by anybody. Serious investors will look at this suit carefully because of the disclosure that the law requires. It is possible to make profits in a razor-thin profitable business by being big. But you can’t scale up losses so this depends on Wayfair’s mixture of variable and fixed costs. The lawsuit may be useful here but certainly not for me.
In my view, local and state government should give this company nothing other than the services and tax burden that other companies have. This is the only way to know if you have a real business being build in Pittsfield. Nothing means ah, NOTHING. No tax abatement, no special services, NADA – just what others get.
CHUCK
Excellent post. “You can’t upscale losses.” That cogently sums up the Wayfair position. From what I’m hearing, the company is approaching the Rubicon. It needs to be big, as you say, for profitability, but it’s “bigness” has reached the danger zone with the losses. 3rd Q ’17 to 3rd Q ’18 saw losses double to $157.7 million. Your advice serves the city well. We should provide businesses with the services and tax burdens that are reasonably expected. But NOTHING MORE. The typical Pittsfield giveaways, especially the dreaded “public-private” partnerships, need to come to an end.
One more point on the NYT story. Short-selling is a sign of disagreement but it is not necessarily a negative sign. Tesla is the most shorted company publicly listed. Some investors love Elon Musk, others think he’s an arrogant fool. The level of short-selling, ie. disagreement, is a useful indicator of the risk of the company. Wayfair is risky and the actions of the C-level employees don’t help, which I take it, is the point of the lawsuit.
Yes. I think most average investors shy away from fairly exotic strategies like short-selling. It indicates risk, as you say, and — while “playing” the market assumes accepting a certain level of risk — suggest added jeopardy. Thanks for sharing your expertise.
Agent, we’ll said again. An sample of a good Non name situation are radio talk shows. Would you reallly want your name on a national talk show? The Russians would have all of your personal info in-sixty seconds. Hello this is Barrie Weirdmont from Palookaville* for example….Just sayin.
Very similar to gov Faker investing in GE,whos,accounting practices are as legal as,enrons, nuclea and seemingly WAFAIR the newest savior of the Berkshires.
Take a hint no business is interested in moving to the corrupt liberal utopias the liberals have created
See Detroit,Chicago,,,, add your favorite American disaster here.
Insanity is doing the same thing and expecting a different result.
Very similar to gov Faker investing in GE,whos,accounting practices are as legal as,enrons, nuclea and seemingly WAFAIR the newest savior.