- Experts are saying that Warby Parker’s stock is valued at a market capitalization of more than $6 billion, and that investors should proceed with caution.
- Several online-first retailers, including Allbirds, Fabletics and Rent the Runway, are preparing to go public.
- How shares trade in the coming weeks will reveal more about Wall Street’s long-term acceptance of Warby’s direct-to-consumer business model.
Warby Parker’s debut on Wednesday set a good precedent for many online-first retailers preparing to go public.
Shares of Warby skyrocketed 36% on Wednesday. Founded in 2010, the company began selling its eyewear online and avoided using wholesale partners to make sales. Its direct listing on the NYSE has put a spotlight on a class of direct-to-consumer brands that may be headed to Wall Street.
Allbirds, Fabletics and Rent the Runway are among those that quickly come to mind. Other peers — including makeup brand Glossier, luggage start-up Away, athletic apparel brand Nobull and sustainable shoe maker Rothy — aren’t eyeing the public markets yet, but they have long followed Warby’s so-called direct-to-consumer. Playbook done.
Despite the strong performance, some experts say Warby’s stock is valued at a market capitalization of over $6 billion, and investors should proceed with caution. According to analysts, Warby has a growth story to sell, but it remains unprofitable, and it still has a lot to prove at its current valuation. How shares trade in the coming weeks will reveal more about Wall Street’s long-term acceptance of Warby’s direct-to-consumer business model.
“The market sentiment about Warby is very liberal, following brands like Peloton, Revolve and Casper, which began by selling products directly to consumers online,” said Dan McCarthy, assistant professor of marketing at Emory University. We are ready to give the benefit of doubt to the company.”
“The fact that they derive so much value from customers so far in the future may at least allow them to talk about scenarios where – a long time in the future – they are going to get significantly more than they are today. would be profitable,” he said.
McCarthy said a fair valuation of Warby would be closer to $2.5 billion. That’s well below where shares were changing hands on Thursday at about $53 a share. This is less than the reference price of the $40 Warby found the night before it was directly listed, which equates to a valuation of $4.5 billion.
“This is a very strong indication that publicly-going companies have a receptive market to sell,” McCarthy said.
However, companies like Warby have done mixed this year. According to investment bank Renaissance Capital, 12 Internet retailers, including Warby, have gone public so far this year, compared to 9 in 2020. Shares of scrub-maker Figs, for example, are up about 31% since listing. But Jessica Alba’s Honest Company has seen its stock drop more than 43%.
Shares of Warby pulled back slightly on Thursday, down nearly 2.6%.
According to Kathleen Smith, co-founder principal of Renaissance Capital, most direct listings will see the company’s stock below the initial listing price within the first 90 days of trading.
“They definitely get the attention of investors,” she said in an interview on CNBC’s “Power Lunch.” “It’s a strong brand. They’re a leader in direct-to-consumer. They’ve done a great job.”
However, she warned, due to the terms of the direct listing, about 80% of Warby’s outstanding shares could be sold. There is no traditional lockup period for shareholders, as is the case with a traditional IPO. This could lead to huge volatility in trading in the coming weeks.
“Warby may have done a good job of selling today’s investors through rose-tinted glasses, because this is a company that’s going to have a lot of volatility,” Smith said. “It’s also being priced at a tremendous premium to anyone else in its peer group.”
At a valuation of more than $6 billion, Warby is trading at a multiple of nearly 13-times trailing revenue, while some of the company’s peers trade close to three to four times sales, Smith said. Meanwhile, retailers like Yeti and Canada Goose — which also started with a direct-to-consumer approach — trade at a multiple of six times revenue.
“There’s a huge gap between what’s happening with the business here with Warby and what’s reality and the rest of the market,” Smith said. “Warby will have to do a lot more to prove this premium valuation.”
To be sure, some believe the Warby’s may deserve a sky-high appraisal. Today, the company says it has only 1% of the total eyewear market, which includes large competitors including Vision Source and Luxottica.
“There is huge growth potential for this type of business,” said Reena Agarwal, a Georgetown University professor and expert in public listings. “And another positive side of this story is that they have this ‘do well’ philosophy.”
Warby is classified as a public benefit corporation, which means it has a legal requirement to balance the interests of shareholders and other stakeholders. The company also has a “buy one, give one” program, where for every pair of glasses purchased, it donates a pair to people in need.
“This company is getting a huge valuation based on market value, and unless it somehow crashes in the next few days, that determines the relative valuation,” Agarwal said.
In time, the public will now be watching closely how Warby manages its business and chooses to spend its capital.
One analyst isn’t already sold on the company’s plan to open dozens more retail stores, seeing it as a capital-intensive effort that could come back to haunt Warby. Today, the company has approximately 145 locations. It said it plans to open 30 to 35 shops this year and aims to expand at that pace annually.
“I honestly doubt they’ll ever achieve any meaningful profitability,” said David Trainer, founder and CEO of investment research firm New Constructs. “If you grow up and don’t make money, you’re going bankrupt really fast.”