Consumer

Shelly Banjo is a Bloomberg Gadfly columnist covering retail and consumer goods. She previously was a reporter at Quartz and the Wall Street Journal.

Don't count Wayfair out yet. 

The fast-growing online seller of home goods and decor is a terrible business, according to hedge fund manager Whitney Tilson, who has said that Wayfair is his largest short position. 

But on Thursday, Wayfair reported a 71 percent jump in annual revenue from the year before to $2.25 billion. The number of active customers is up 67 percent from a year ago. While it wasn't able to muster a profit in its latest quarter, Wayfair did report its smallest loss since it went public in October 2014. And it did generate its first quarter of positive adjusted Ebitda as a public company.

CEO Niraj Shah reminded analysts on the conference call that Wayfair was profitable in its first nine years of operation and that "running Wayfair profitably over time is central to our beliefs and our business philosophy," in stark contrast with Amazon CEO Jeff Bezos, who has only mentioned the word "profit" in two of his annual letters to shareholders since 1997

Coming Up Short
Wayfair still hasn't posted a profit, but its losses are narrowing
Source: Bloomberg

The stock jumped by as much as 12 percent on Thursday to $45. But let's look back for a moment.

Tilson -- who is quite outspoken for someone with $70 million in assets under management -- has called for the stock to go down to $10 a share. Back in September, it was trading at around $37, down from a $57 high, when Tilson revealed his short position. In November, Tilson publicly compared Wayfair to Lumber Liquidators, which U.S. regulators have cited for selling wood with dangerous levels of formaldehyde, and Wayfair's stock went down to about $35.

At the time, Tilson told Bloomberg Television he found high levels of formaldehyde in a handful of Wayfair products he personally sent for testing, leading him to determine the company "doesn't have a firm handle on its business, quality control and compliance." He also said he didn't think Wayfair would ever make a profit. In an email exchange with me on Wednesday, Tilson said he stands "behind what I said and wrote about the company."

Wayfaring Wayfair
Source: Bloomberg

Tilson has seen Wayfair's stock rise 10 percent in the past three months, compared with a 15 percent decline in the Russell 2000 Index. Analysts tracked by Bloomberg have steadily increased their 12-month price target on Wayfair to $58, with 10 of 15 analysts rating the stock a "buy" and five rating it a "hold." Other hedge funds have invested in the company, including Steadfast Capital, which manages around $8 billion and this month disclosed a 5 percent passive stake in Wayfair.

A lot of folks are still betting against the company: More than 33 percent of Wayfair's free-floating shares are held short, according to data compiled by Markit. But that's down from 55 percent a year ago.

The call ultimately comes down to this: Will Wayfair go the way of Amazon, reporting meager profits but gobbling up market share to become a dominant force in retail, or will it flame out like other one-time e-commerce stars such as Zulily and eBay? We're betting on the former.

Wayfair has proven it can book a profit, but is choosing to reinvest revenue back into growth. Already in the past year, the company has nearly doubled its revenue -- and that's with 95 percent of its operations in the U.S. selling a relative handful of products. More growth will come as it expands its product line and ventures outside of the U.S. to Canada, the U.K. and Germany. 

It's also attracting new customers: Order growth rose 67 percent in 2015 from the year before. But more importantly, previous customers are spending more and buying more often: Repeat orders rose 92 percent in 2015, and revenue per active customer rose 11 percent. That means it has to spend less on customer acquisition.

While other retailers are reporting a weakening consumer and a need to lure them in with discounts, Wayfair's CEO on Thursday said the company "frankly hasn't seen these trends." 

Wayfair has proven to be a veritable competitor to Amazon and could find itself an attractive takeover target for Amazon itself, or even a more traditional retailer such as Home Depot or Lowe's. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Shelly Banjo in New York at sbanjo@bloomberg.net

To contact the editor responsible for this story:
Mark Gongloff at mgongloff1@bloomberg.net