Should You Buy This Dirt Cheap Stock Before It Soars 83%, According to 1 Wall Street Analyst?

Wayfair (NYSE: W) is trying to stage a comeback, but it's operating in a challenging environment, making progress an uphill battle. The digital furniture king continues to try new things, and while there have been wins along the way, it's not out of the woods.

The average Wall Street consensus is a 42% gain for Wayfair stock over the next 12 to 18 months, with one analyst seeing it rise 82%.

Let's check out what's happening.

Image source: Getty Images.

Slow real estate = slow furniture sales

Wayfair made several missteps over the past few years, compounded by a hostile operating climate. As the real estate market remains challenging, there's less of a need for new furniture, and many retailers that operate in real estate-adjacent spaces have been under pressure.

Wayfair uses a dropship model, which means that instead of buying goods from suppliers and reselling them to consumers, it markets products for its partners, who take the sale and ship directly. Theoretically, that should be cheaper to operate than a classic retail model; Wayfair's expenses mostly amount to marketing, research and development, and administration. However, the company continues to operate at a loss.

It has been improving. Sales are finally increasing again, up 6.9% year over year in the fourth quarter, which implies that it's past rock bottom, and net loss contracted from $128 million to $116 million. Operating margin was positive, and free cash flow improved by 40% from the prior-year period.

W Net Income (Quarterly) data by YCharts

The question is where all of this is going. There's momentum and improvement, and the company has launched several new initiatives to ramp up further and capture market share despite the rough climate.

It recently rolled out a membership program that costs $29 annually and is meant to reinforce loyalty, and even non-active customers are signing up. It's opening new physical stores to capture omnichannel market share, and it's curating locations that are close to distribution centers so products can be delivered quickly.

Priced to buy

At the current price, Wayfair stock trades at 29 times trailing-12-month free cash flow and just 0.8 times trailing-12-month sales. The market isn't sensing opportunity here.

However, shares could be oversold at this point, which is why every Wall Street target price implies a gain for the stock. It's certainly risky, since the company hasn't yet figured out how to turn sales into profits, but the trajectory is up. If you have an appetite for risk, Wayfair looks priced to buy right now, and the upside could be huge. But for most investors, there are more reliable options out there.

Jennifer Saibil has no position in any of the stocks mentioned. The Motley Fool recommends Wayfair. The Motley Fool has a disclosure policy.