After It’s Recent IPO, Should Investors Set Their Sites on Warby Parker (WRBY)?

Eleven years since its founding, eyewear company Warby Parker Inc. (WRBY) has made the journey from a little known start-up to a publicly traded company. In that time, WRBY has been able to capture a cult-like following of people that wear prescription eyewear and those who just want a quality pair of sunglasses. WRBY’s products feature scratch-resistant lenses that block 100% of ultraviolet A (UVA) and ultraviolet B (UVB rays).

In addition to their eyewear products, WRBY sells contact lenses and offers eye exams at their 157 retail stores across the United States and Canada.  The company also engages in Environmental, Social, and Governance (ESG) practices with their Buy a Pair, Give a Pair program, which distributes free eyewear to people in need.

Last week, on September 29th, WRBY had its IPO. Since then the stock is trading down about 6%. Today, I will analyze WRBY’s fundamental picture and growth potential to establish if this stock deserves a place in your portfolio.

WRBY’s shows a fast-paced top-line growth, but the company still remains unprofitable

Analysts’ top-line growth expectations for the eyewear brand are encouraging.  WRBY’s net sales should grow rapidly in the next two years, up 25.9% to $676m in 2022 and up 29.7% to $877m in 2023. At the same time, WRBY’s EBITDA is also expected to rise, up 28.6% to $360m in 2022 and up 88.9% to $680m in 2023. 

Despite growing revenues by nearly 30% compounded annually since 2018, WRBY’s profits have deteriorated and the company is still losing money and should report a net loss of $53.21m in 2021, compared to a net loss of only $1.66m in 2019. 

WRBY’s management focuses on adjusted EBITDA to present its profitability level. However, I prefer to look at WRBY’s bottom line, which illustrates total expenses more thoroughly. This deterioration is mostly attributable to higher operating expenses that have risen from $220.6m in 2019 to $343.2m in 2021, representing a surge of 55.5% during that time.

With its recent listing, the company has raised cash, enabling it to fuel its growth prospects and open new stores in the U.S. and Canada. WRBY’s balance sheet looks healthy for the time being with a net cash position north of $300m that seems sufficient to accelerate its growth.

Management indicated in its latest investor presentation that it is more focused on growing the business instead of allocating funds to increase net revenue growth. However, that might not turn out well for WRBY’s medium and long-term stock performance.

The company’s addressable market is huge, but valuation metrics are stretched

WRBY’s current market share represents only about 1% of its total addressable market which equals $35b. This should create a favorable backdrop for the company’s growth for years to come, thanks to its strong brand name and high visibility in the eyewear space. 

The company has, however, managed to consistently acquire new customers in the past years. It had about 2.1 million customers at the end of the second quarter, up 20% from that time last year. In addition, management is working on raising its relatively low brand awareness of only 13%, which should provide additional opportunities for the company in the long-term

In terms of valuation, WRBY looks overvalued compared to industry peers. With a P/S ratio of 12.15x, WRBY is trading at a huge premium compared to its closest peer, National Vision Holdings Inc. (EYE) which is currently valued at a P/S ratio of only 2.26x.

Take away

WRBY seems poised for high top-line growth as it establishes itself in an industry with a total addressable market of around $35 billion. However,  WRBY remains unprofitable and its profitability should decrease even further once the company starts expanding its retail shop network. Therefore, I do not believe the stock deserves a place in investors’ portfolios at this time.