With 22 million Americans recently tossed out of their jobs due to COVID-19, you would not expect to see a robust demand for new houses. The April 21 news that March home sales fell 8.5% and could plunge 30% to 40% in future months reinforces that view.

In light of that, a drop in demand for furniture that would make those houses livable seems likely.

So why have shares in online furniture purveyor Wayfair — in which I have no financial interest — soared 365% since bottoming out at $21.70 on March 19?

A huge short interest (49.4% of float as of March 13) coupled with a surprising piece of good news about growth — have combined to send short sellers scrambling to buy shares to repay stock they borrowed from their brokers.

In a February 28 investor conference call, CEO Niraj Shah was exuberant. “Wayfair’s journey thus far has been remarkable. But in truth, we’re even more excited about the opportunity ahead. In many ways we think [what’s] to come will be even more exciting.”

A deeper look at Wayfair’s business fundamentals makes me question this rally’s sustainability.

Rising Machete

In mid-February, I wrote that Wayfair — which had fallen 53% from its March 2019 high of $174 — was a plummeting machete in the wake of 550 layoffs that month. The shares continued to drop from $82 to its March 19 low — and then began an upward climb.

The catalyst for much of the stock’s recovery is a combination of faster-than-expected revenue growth and a big infusion of debt to keep its cash-burning operations afloat.

On April 6, Wayfair shares rose as much as 51% after the company said its first quarter net revenue would grow at least as much as expected and that “a sharp increase in sales at the end of March [had] continued into April,” according to Bloomberg.

Towards the end of March, Wayfair said its “gross revenue growth rate more than doubled” which relieved pressure on the stock after news that social distancing measures in response to COVID-19 were disrupting its supply chain. In addition, Bloomberg reported, Wayfair raised $535 million in convertible notes from a group of private equity investors.

Industry Dynamics Look Good To Wayfair

Wayfair sees a large, rapidly-growing market. As Jefferies analyst Jonathan Matuszewski told me in an April 20 interview, “Wayfair sees the U.S. online furniture market as a $42 billion opportunity growing at a 15% compound annual rate [CAGR] through 2024 compared to 1.3% CAGR for the offline furniture retailing.”

In response to COVID-19, offline furniture retailers have shut down and Wayfair is helping to meet the unsatisfied demand. As Matuszewski told Bloomberg, “[the] pureplay e-comm business model is taking share in an environment where about 80% of the category is closed for business, its largest online competitor [Amazon] is focused elsewhere and consumers are spending on their homes. Growth of slightly below 20% sits above the high-end of management’s guidance for 15% to 17%.”