Read before buying!
Wish has been one of the top trending stocks on Reddit and Twitter (i.e. FinTwit) lately. It's an interesting one because I wouldn't exactly call it a "meme stock"... It's a little more than that. But, with its recent decline and upside potential, is it a buy? Let's take a deeper dive.
Wish's IPO took place in December 2020, where it began trading at $24 per share. It has since took a 50% nosedive, to where it's trading (today) below $12 a share.
Of course we need to understand why...
But, the first let's check the stock's "meme potential" or, in other words, the Short Interest (SI). In this case, Wish has an SI of less than 5.4% – which isn't that high. This tells me that short-sellers aren't betting against this stock (which is typically a good thing), but it also means that there will be no miraculous "short squeeze" that Wall Street Bets might be hoping for.
For me, the answer is clear... Wish is NOT Amazon or eBay – not even close!
But, there's two (2) fundamental reasons for its decline since IPO:
- A class-action lawsuit brought by Hagens Berman for investors who bought at or near IPO and suffered losses due to potentially adverse information withheld by Wish in its IPO documents. The claim is regarding ContextLogic’s reported 108M monthly active users (MAUs), whereas by the time of its December 2020 IPO, their MAUs had “declined 10% YoY during Q4 to 104 million.” If this was known at the time of IPO, it would be their fiduciary duty to disclose it.
- The (more concerning) unclear path to profitability. I'll get in to this below.
What is Wish's mission?
"Bring an affordable and entertaining mobile shopping experience to billions of consumers around the world."
What I take from that, and sifting through their S-1 filing, is that they are price-centric first and experience-centric second.
While I agree with the price-centric part, I don't necessarily buy into the experience part of Wish. Sure, you can find a bunch of cool gadgets for dirt cheap... It's like bargain hunting. But, in reality most people are buying stuff on there just because it's cheap... they just want to see what they get.
Aside from the huge counterfeit issues that come from Chinese vendors (which I won't get into), I'll just let the memes speak for themselves.
The path to profitability
This is main concern I have with WISH stock... That's not to say it isn't priced to reflect that. But, let's have a look.
In terms of financial health, I know a lot of people are looking at the $1.6B in cash on their balance sheet, but a most of this comes from the recent IPO. Sure, they shouldn't need any additional debt for a while... but, at the rate they're spending, they'll eventually need something.
The issue is their Selling General & Admin Expenses (SG&A) which is anywhere from 80-100% of revenues. That, in my opinion, is just ridiculous! They are not capital-intensive. And ANY company running a pure e-commerce play shouldn't have to spend a fraction of that to be profitable. Let's take Amazon and eBay for example. They both maintain profitability with 23% and 35% SG&A as a percentage of revenue, respectively.
SG&A, from their balance sheet, is mostly Sales & Marketing – which is, of course, driving the revenue growth, right? But, realistically speaking, they only grew 10% in 2019. Their growth in 2020, is unarguably due to COVID. Although management is forecasting 2-4% sales growth in 2021 Q2, I highly suspect this number might come in the negative.
Again, my main issue with the high marketing spend is when it's coupled with the decline in MAU. This tells you, everything you need to know... the meme's are true, and most people don't stick with the platform.
From the graph above, you can see the impact of what happens once Wish pulls back it's direct response marketing budget in South America. A 22% YoY decline is a big number. This goes to show the buyers are mostly acting out of direct response advertisements, and there isn't much brand equity and loyalty being built.
Besides all this, I don't really get a confident vibe from CEO Peter Szulczewski when answering this question.
So, that's my main concern... but is it priced right?
Is WISH stock a buy?
Valuing WISH is a challenging task, that's near impossible to have conviction with. I've seen bloggers and YouTubers coming up with DCF analysis – and I have nothing against them – but it just didn't feel right taking such big assumptions above Wish's path to profitability for me to even justify doing this exercise.
The most fundamental metric to a DCF analysis is Free Cash Flow. Given the company's history, it's near impossible to forecast what this is going to be going forward... let alone when it'll be positive.
Based on an assumed revenue growth of 10% YoY (the most I feel comfortable with) I find that there is potential to be profitable in 2025. But, the margins are very compressed, and Wish is going to have to figure this out.
There's, in my opinion, a fundamental issue with the model and the user experience – which is why it appears that users are not sticky to the platform. Can this be solved? Absolutely. Does Wish have a significant asset of over 100M MAUs? Absolutely. Is there a potential upside to the valuation from where it is today? I believe there can be... but that will depend on the management and execution to take Wish from what it is today, to something bigger and better.
However, for that upside reward, there is unquestionable risk... but I wouldn't go as far as saying Wish is overvalued. It's a really good price for what you're getting here. But, for me, it's always about risk/reward. Does that risk/reward ratio look better as an Amazon stockholder? That's a question we'll answer next time 😉
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