Why I Bought Shares of Wix.com After 2018 Results

As a value investor at heart, I'm often late to the party. That's been the case with Wix.com (WIX -2.50%), which I just recently purchased for the first time after the company reported full-year 2018 results. Since the cloud-based website company went public in late 2013, its stock has jumped from an IPO price of $16.50 to $107 a share as of this writing -- a massively profitable 550% return.

So why now? Part of the reason has to do with my increasing familiarity with the business (my wife started building a blog on Wix.com). I also liked the numbers from the last year, and the subsequent pullback in share price looked like opportunity enough -- though many of my fellow value investors would argue that the stock is hardly cheap. Nevertheless, in today's fast-changing global economy dominated by digital transformation, "growth at a relative discount" is better than "cheap for a reason."

Check out the latest earnings call transcript for Wix.com.

2018 by the numbers

Wix capped off its fifth year in a row as a public company with revenue growth north of 40%. That's quite the feat, especially as the company closes in on $1 billion in annual sales. Of particular note, though, is the enviable profit margin on services sold, still near 80% even as the business expands at breakneck speed. Operating expenses are still growing, too, but much of the advance in 2018 was due to research and development (up 29%) and sales and marketing (up 22%) to keep pace with double-digit top-line expansion.

With another big year in the books, Wix is beginning to reach profitable scale for the first time. Adjusted for stock-based compensation and other one-time items, earnings rocketed into the black in 2018.

Data source: Wix.com. YOY = year over year; p.p. = percentage point.  

Also of particular interest were the number of registered users and premium subscriptions Wix now has. Registered users increased 19% to over 143 million, and premium subscriptions were up 24% to nearly 4 million. That's a slowdown from years past, but still impressive.

However, adding paying users is only one lever. Wix continuously rolls out new tools and capabilities to monetize its user base. Average annual revenue per user hit $168 at the end of 2018, compared with $150 at the end of 2017.

That trend should continue as management points to new products that were just recently released or will be released in the year ahead. Revenue is projected to grow 25% to 26% in 2019 and free cash flow by 33% to 38%, but that doesn't fully account for management's expected benefit from new growth initiatives. Thus, a low bar may have been set, but we'll have to see as the year progresses.

Image source: Getty Images.

Nibble now, nibble a little more later

But what about that valuation? The trailing 12-month P/E using adjusted earnings values Wix at 100 years-worth of profits. Using the more accurate metric of price-to-free-cash-flow (which is cash left over after basic operations and capital expenditures are paid for) yields a better ratio of 51.1, but no one is going to call that a bargain, either. It's worth noting that, since Wix is investing so much cash for growth, it won't actually take that long for profits to equal the stock's trading price. 

To demonstrate that point, expected free cash flow for 2019 drops the valuation ratio down to a range of 37.1 to 38.4 -- expensive, but not outrageous for a company growing so fast and leveraging profit improvement even faster. But again, bear in mind Wix is investing more cash than it generates in order to grow. As long as double-digit expansion continues, that's an acceptable situation. The recent pullback in share price, brought on by investor concerns over a looming revenue slowdown that might not even transpire, looks like a good place to get started in a position.

As with all growth stocks I buy, I'm cautious and tend to buy a little bit here and there rather than all at once. I'll grow my small position over time whenever there's a significant pullback, assuming all remains well at Wix. But with the internet company expanding quickly and with profits only just starting to coalesce, there should be plenty more upside ahead.