2022 has been a tough year for the stock market. The S&P 500 is down close to 20% year to date, one of the worst first-half performances in the last 100 years. But if you own recent IPO stocks, the losses have been much worse. The Renaissance IPO ETF is down 47% this year, meaning that if you own a bunch of stocks that recently went public, the value of your portfolio has been cut in half in less than a year. While that’s not an enjoyable experience, if you have a long-term time horizon, now is a perfect time to invest in some businesses while they trade at discounted prices.
One intriguing company is Warby Parker (NYSE: WRBY), a disruptive glasses/eyewear company whose shares are down 7% this year. Let’s see whether Warby Parker stock is a buy at current prices.
Disrupting the eyewear market
Warby Parker is one of the leading direct-to-consumer (DTC) start-ups of the last 15 years. The founding team saw how expensive eyeglasses were compared to the costs of building frames and decided to try to disrupt the market. With a vertically integrated model through both e-commerce and in-store offerings, Warby Parker has undercut the legacy selling model and won customers with their comparatively inexpensive but still high-quality eyewear.
Right now, the company has 169 stores and generated $555 million in revenue over the last 12 months. It operates solely in North America right now and eventually thinks it can get close to 1,000 stores in the U.S and Canada. With the U.S. eyewear market valued at $44 billion each year and growing, it looks like Warby Parker has a ton of potential to keep growing its revenue.
Meager Q1 results
When Warby Parker went public back in 2021, its revenue was growing 30% year over year. At its analyst day and other times when talking with investors, management stated its goal of growing revenue by 20% year over year for the foreseeable future.
That hasn’t materialized so far. In Q1 of 2022, Warby Parker’s revenue only grew 10% to $153.2 million, a huge slowdown from 2021 when revenue was growing between 20% and 30% each quarter. On top of slower revenue growth, Warby Parker is still highly unprofitable, with a $33.7 million operating loss in the quarter.
Revenue is still growing, so this isn’t a terrible development for Warby Parker, but it is no surprise that the stock is down so much this year with this combination of slow growth and no profits. The long-term opportunity is still intact, but if you are thinking of investing in Warby Parker, you need to be confident it can return to 20% annual revenue growth and start generating profits sometime soon.
Price looks fine, but management practices reveal red flags
Warby Parker trades at a market cap of around $1.3 billion. With $327 million in trailing gross profit, the stock trades at a price-to-gross profit of 4, which seems like a reasonable price to pay for the business if you believe in the long-term growth story. But it’s not the numbers that are keeping me away from Warby Parker stock. Instead, it’s the red flags coming from the company’s management team.
The first red flag is that, according to the proxy statement, co-CEOs Neil Blumenthal and Dave Gilboa became general partners in a venture capital firm in 2019. This should concern any prospective shareholder that the pair are focused on things outside of running Warby Parker, which should be a full-time task in and of itself. Secondly, Warby Parker is paying the co-CEOs huge stock grants worth over $100 million each, assuming Warby Parker’s stock reaches certain milestones. This is not a bad tactic in and of itself, but it is not a good look when both executives already own over 5% of the business. This indicates to me that the pair is more focused on enriching themselves with huge compensation packages than they are on creating value for shareholders.
Even though the stock is trading at a reasonable price and the long-term opportunity looks promising, it is best to avoid Warby Parker right now due to management’s unfriendly decisions toward outside shareholders.