Investors who bought the emerging e-commerce company ContextLogic (WISH) at its IPO are not pleased. Right now, WISH is trading at roughly 10% of its all-time high, which occurred shortly after its IPO in December 2020, and has since been on a consistent downtrend. Due to the significant roadblocks ahead, I am bearish on WISH.
The Good
WISH, for all its current faults, does have value in it, the first thing being a strong balance sheet. As of Q3 results, WISH is carrying $1.07 billion in cash, and $143 million in marketable securities, with no material debt. The price/book ratio currently sits at 2.8x, where most of the book value is provided by cash.
WISH already has a large reach, servicing over 100 countries with over 550k merchants and monthly active users (MAU) of 60 million. Existing connections are a clear point of strength and will need to be leveraged if profitability is to be reached.
Its price/sales is a minuscule 0.9x compared to companies like eBay (EBAY), Amazon (AMZN), Alibaba (BABA), and Etsy (ETSY), which have a price to sales of 3.9x, 3.86x, 2.7x, and 14.7x, respectively. The compared companies are significantly larger by market cap and more mature, so normally, the price/sales ratio should be lower than smaller companies.
To extend the current cash holdings and achieve management’s goal of H2 (second half) 2022 growth, a reduction in short-term advertising expense is being implemented. This punishes revenue in the short term, but ultimately, I believe this is a proper decision by management to extend the current cash holdings to have a chance of achieving the goal of H2 2022 growth.
The Bad
WISH had optimal market conditions to have an IPO, the core business benefited from lockdown orders, and the market was filled with cheap money. Lockdowns increased the amount of MAU, giving many investors a false sense of growth altering the initial valuation expectations.
During the height of lockdowns, Q2 2020 e-commerce sales were up 31.8% quarter-over-quarter. Now, lockdowns are done, for the most part, leading to a natural downward decline in dependence on online retailers. Therefore, investors need to change growth expectations.
Hedge funds initially held 556,000 shares during the initial quarter after the IPO and have since sold to 10,550 shares. Generally considered ‘smart’ money, it is usually a bearish signal. Similarly, insiders have only been selling, not unusual after an IPO, but this has continued throughout the declining price.
The C-suite is in a state of flux; the CEO role is currently in question after co-founder and CEO of 10 years Piotr Szulczewski stepped down. No replacement CEO has been appointed at this time.
Apart from the financials, there are notable issues with the service, mainly the rampant scams, counterfeit, and safety issues that may come with the products. Any online marketplace which lists third parties has these issues, but WISH is noticeably worse.
France asked large tech companies, including Alphabet (GOOG) and Apple (AAPL), to remove access to the app as well as search results. The French administration found that 45% of products were dangerous, 95% of electronics shouldn’t be available in Europe, and 90% were dangerous.
WISH has started to fight back with “Wish standards,” a method where they reward higher-quality merchants, but based on France’s recent decision, as well as large amounts of clearly fraudulent items, the program clearly has not succeeded, at least yet.
WISH ran a free cash flow of -$345 million for Q3 2021, although still notably negative, it is an improvement over Q3 2020’s free cash flow of -$473 million. Even with the large cash and liquid securities buffer and using the more generous rate based on the previous nine months, free cash flow of -$903 million leaves enough cash for a year of operations until roughly Q3 2022.
The Ugly
During the IPO period, the growth of MAU was a leading point for the valuation. Now, it is a point of weakness. MAU has decreased from 100 million in Q3 2020 to 60 million in Q3 2021, a 40% drop. Management attributes the drop to a decrease in advertisement spending, which dropped from $386 million in Q3 2020 to $147 million in Q3 2021, a 62% drop.
Interestingly, a $1 drop in advertising spending roughly correlated to a $1 drop in revenue on a marginal basis. While lowered advertising does lead to a drop in MAU and revenue, it will lead to a better profit margin, for the time being, with the trade-off being diminished growth. The relation of advertising, MAU, revenue, and profit will be a key factor in WISH going forward.
| (Figures in millions) | MAU | Revenue | Advertising Expense | Profit |
| Q3 2020 | 100 | 606 | 386 | -99 |
| Q3 2021 | 60 | 368 | 147 | -64 |
| Change | -40.00% | -39.27% | -61.92% | -35.35% |
If you are still considering WISH despite the risks, the above figures should be watched for upcoming quarters, as they will show whether or not management’s goal of shifting to repeat customers is succeeding.
TipRanks’ website traffic tool can closely track WISH’s internal metrics for MAU. It will be useful in 2022 to stay ahead of the reported MAU.
WISH needs to undergo significant changes, but management needs to execute changes extremely well. Due to excessive financial risks and unknown management, I believe WISH is currently a Sell.
Wall Street’s Take
Turning to Wall Street, WISH stock earns a Moderate Sell rating based on four Holds and two Sell ratings assigned during the past three months.
Despite this, the average WISH stock price target of $4.92 implies 50.2% upside potential.
Disclosure: At the time of publication, Brett Rodway did not have a position in any of the securities mentioned in this article.
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