Can Wayfair (W) Outpace (AMZN) With a Strategic Merger in 2024?

Reports suggest that Chinese e-commerce companies Shein and Temu may be plausible merger candidates for American home goods retailer Wayfair Inc. (W). This conjecture emerges amid a challenging period for W, which has experienced a decline in active customers and a significant 76% plunge in share price over the last three years.

A strategic merger with W could present an opportunity for both Shein and Temu to elevate their brand image beyond the "bargain basement" stereotype. More importantly, it could empower them to compete more prominently against industry leader, Inc. (AMZN), especially as they navigate regulatory scrutiny.

Given the recent stringent regulatory oversight aimed at businesses founded in China, a merger with W might further solidify their standing in American marketplaces.

Shein, known for its high-velocity fashion production, privately filed an Initial Public Offering in the U.S. in 2023, projecting to become a publicly traded entity by 2024. This milestone stands to make Shein one of the most valuable Chinese start-ups listed on U.S. exchanges.

Conversely, Temu serves as a broad-spectrum online marketplace offering various products, from clothing and cosmetics to electronics and homewares. A possible merger prospect could exacerbate the already intense rivalry between Shein and Temu.

Among the two, PDD Holdings – the parent company of Temu – appears better positioned for acquisition due to its substantial $197 billion market cap as compared to Shein's $66 billion.

A potential amalgamation with W could permit Temu to diversify its product portfolio and leverage W's specialist home goods proficiency. Nonetheless, Shein is believed to be a more synergistic match for W, given that W's extensive domestic logistical capabilities are likely to enhance Shein's commitment toward optimizing distribution within the U.S.

Regulatory concerns in the U.S. pose potential challenges to the possible merger between Shein or Temu and W. This complexity is further intensified as the political landscape between China and the U.S. is becoming increasingly strained, fueled by escalating concerns over Chinese influence in American investment decisions. Such issues may impact the feasibility of the proposed union on a large scale.

Now let’s delve into a comparative analysis to assess whether Wayfair could outpace Amazon after the strategic merger in 2024…

Wayfair Inc. (W)

Reflecting on the aftermath of the pandemic, 2021 marked a successful year for retailers specializing in once-popular pandemic items like stationary bikes, used cars, furniture, and pet food sold online. This was largely attributed to consumers with surplus savings ready to spend while stuck at home and supported by advantageous financing conditions.

However, online furniture retailer W has witnessed a downturn from its height of sales, now selling less than it once did at its peak. This struggle has been somewhat mitigated through strategic cost-cutting measures and financial engineering practices in certain situations.

These cost-reduction efforts have been instrumental in limiting the company's cash burn rate. W plans to minimize costs by over $1 billion. In a bid to streamline operations and boost agility, the company trimmed its global workforce by 10% - roughly 1,750 employees – in January last year.

In November 2022, W set out another deficit reduction target of a half-billion dollars. At the same time, the company endeavored to bounce back from a quarter that saw declines in revenue, active customers, and overall orders.

This recovery plan included enhancements to wholesale economics, merchandising gains, and elevating mixed-supplier services. To encourage more suppliers to use its platform, W improved its logistics network by offering better delivery speeds and competitive pricing. Coupled with vendor-funded promotions, these steps buoyed W's overall gross margins. Wall Street predicts the company to generate positive free cash flow on an annual basis in 2024.

It seems unlikely that hefty discounts will entice consumers to purchase new furniture in the immediate future. W's revenue growth has been inconsistent in recent years, and this is projected to be their third consecutive year of declining top-line results.

On the brighter side, there are signs that W is making a recovery. After nine consecutive quarters of year-on-year top-line decreases, the company recently reported total net revenue of $2.94 billion – a 3.7% year-over-year increase. Its U.S. net income increased by $132 million, marking a 5.4% year-on-year increase. However, W's adjusted loss per share lingered at $0.13.

W's active customers totaled 22.3 million as of September 30, 2023, a decrease of 1.3% year-over-year. Its long-term debt, as of September 30, 2023, stood at $3.21 billion, with a net loss of $163 million in the last quarter. With continuous refinancing of convertible debt at lower conversion prices and a higher interest rate, coupled with equity-based compensation, there comes a significant question: What will the share count amount to if W starts reporting positive net income?

Foundational to W's business model was the thrilling potential of directly selling oversized, hefty household items. However, it soon became apparent that the more traditional approach, as modernized by W’s competitors, yielded more substantial profits. This revelation paints W’s innovative idea as not altogether successful, suggesting it may yield no better results for entities such as Temu or Shein.

W looks set to bolster its international footprint and customer base through a promising merger. Given Shein and Temu's considerable generated traction within China and further markets, this merger presents a viable opportunity. Moreover, W could potentially tap into advanced technology and innovation employed by Shein and Temu, significantly in the spheres of AI, data analytics, and social media, which could enrich its customer's shopping experiences.

Analysts project W's return to profitability by 2024, markedly sooner than previous expectations. The upgraded forecast comes following the favorable response to the company's third-quarter reports. In the face of likely declining interest rates and a generally more promising economic forecast in 2024, circumstances are slowly turning favorable for W's digital business platform.

For the fiscal fourth quarter of 2023 (ended December 2023), its revenue is expected to grow 1.7% year-over-year to $3.15 billion. EPS is expected to increase 92% year-over-year but remain negative at $0.14., Inc. (AMZN)

The forthcoming merger might intensify competition for AMZN within the online furniture and home decor sector. W boasts a notable brand image and customer allegiance in this industry, while Shein and Temu possess the potential to drive increased traffic and sales to the merged platform.

AMZN could be closely tracking this competitive scenario as it faces eroding market share. To counteract this trend, AMZN has been taking strategic measures like reducing certain vendor fees with the intention of attracting more businesses from China. However, this strategy might have been implemented too late to recover the lost market share effectively.

Furthermore, the merger could undermine AMZN's competitive pricing advantage. Firms like Shein and Temu are well-regarded for their competitive pricing and discount offerings, giving W a chance to capitalize on these economies of scale and strong supplier relationships.

The synergy also represents a challenge to AMZN’s customer experience. With Shein and Temu's curated and personalized shopping features, such as 3D visualization, augmented reality, and social sharing, W has the opportunity to boost its design inspiration and customer service capabilities.

On the bright side, over the past three and five years, its revenue grew at CAGRs of 16.8% and 20.2%, respectively. Its tangible book value grew at CAGRs of 33.2% and 45.5% over the respective timeframe.

AMZN's investment in faster delivery bore fruit just before the Christmas season. In the two weeks preceding the holiday, the tech giant reportedly claimed 29% of the worldwide volume of online orders, based on data from Route, a package-tracking application that recorded some 55 million orders. This percentage marked an increase from the 21% achieved during the week of Thanksgiving.

Furthermore, current easing inflationary pressures have resulted in positive shifts in consumer sentiments, setting the stage for a potential upswing in spending. Collectively considering these elements, the ensuing months could be exceptionally profitable for AMZN.

For the fiscal fourth quarter of 2023 (ended December 2023), its revenue is expected to grow 11.3% year-over-year to $166.07 billion, while EPS is expected to increase significantly year-over-year to $0.78.

Its revenue and EPS for the fiscal first quarter (ended March 2024) are expected to increase 11.6% and 116.5% year-over-year to $142.10 billion and $0.67, respectively.

Wall Street analysts expect the stock to reach $183.28 in the next 12 months, indicating a potential upside of about 26.8%. The price target ranges from a low of $145 to a high of $220.

In comparison to the last decade, AMZN today is neither the cheapest nor the only online shopping option, especially when accounting for burgeoning international competition. To meet projected growth, AMZN must exponentially expand its international reach. As a result, past performance cannot be the sole determinant of future success.

Despite being a remarkable enterprise, aligning investment with opportune timing is crucial to generating sizable returns.

Bottom Line

It might indeed be an opportune moment to invest in e-commerce stocks broadly, but the market hasn't presented the same favor for larger-scale furniture goods and additional home décor. Elevated mortgage rates are tempering real estate transactions, thereby making it more difficult for consumers to substantiate the acquisition of new domestic adornments. This could impact W.

Should W choose to engage in a merger with either Shein or Temu, it could potentially surpass AMZN in home furnishings and décor. A merger would pave the way for new customer bases, market opportunities, and access to innovative technologies. However, significant risks such as regulatory challenges, the likelihood of cultural discord, and potential brand dilution may also arise.

Consequently, it is imperative for W to carefully balance the pros and cons related to each merger possibility while formulating a strategic, clear, and potent approach to compete with established giants like AMZN.