Wix.com Is Now Israel's Second Largest Company. Is It a Buy?

After booming more than 125% in 2020 to date, Wix.com (WIX -2.00%) has a market cap of $15.3 billion, making it Israel's second largest company, just behind cybersecurity firm Check Point Software. With many in-person operations being rendered redundant during the COVID-19 crisis, small businesses and professionals have been scrambling to implement continuity plans, and Wix has been a big beneficiary.

It's unclear how long the digital bump will last, but after investing in new web-based applications, it's unlikely most businesses (or their customers) will completely revert to the way things were before once the novel coronavirus has been beaten. Over the long term, that bodes well for Wix, though shares are priced at a high premium as of this writing.

Image source: Getty Images.

The 2020 halftime report

Wix posted second quarter results (the period from April to June, the worst of the economic lockdown) that easily surpassed management's guidance provided a few months ago. Revenue increased 27% year over year to $236 million. And an acceleration in new user sign-ups, premium subscriptions, and business services (like digital payments, shipping, and social media integration tools) led to a 52% increase in free cash flow (revenue less cash operating and capital expenses) to $46.7 million.  

Paired with the first quarter, 2020 has provided a big boost for Wix as the internet has only grown in importance during the pandemic. 

Data source: Wix.com.  

Booming online small business for the win

Granted, while new user and premium subscriptions are likely to slow down again going forward (which will also cause free cash flow to cool off as well), all of those new businesses using Wix to build and manage their web presence should provide some upward lift to its revenue profile for the rest of 2020. Management issued guidance for another 26% to 27% increase in sales during the third quarter.  

But longer term, Wix is in good shape and is worthy of attention for patient investors. Peers like Shopify and Etsy got similar bumps from small business retailers and craftspeople, respectively, in recent months. But a new norm of self-employment that could reshape the economy over the next decade is creating an enduring trend for the online tech specialists. Wix's services have appeal among a wide range of internet-based businesses but especially in the service industry. 

Wix has pre-built website templates for restaurants (perhaps especially important given the controversy surrounding "delivery" apps and the narrowing profit margins for the industry), mom-and-pop shops, and professional services. As small businesses and sole proprietors look to update their operations for the times, Wix could increasingly be looked to as a key partner. The business services segment will likely take over as the primary growth driver in the years ahead as Wix's user counts slow, but it now has a massive global base of customers to work with as the world starts to pick up the pieces from COVID-19. 

To help with its marketing and growth efforts, Wix also announced it was raising $500 million in fresh cash via a new convertible debt offering (at 0% interest, due in 2025). That adds to the $370 million in convertible debt already on the books but also further bolsters the approximately $1.0 billion in cash, equivalents, and investments on the balance sheet at the end of the second quarter. Indeed, Israel's now second largest enterprise has the firepower to keep expanding.

After the big run-up in share price this year, Wix trades for about 18 times trailing 12-month revenue and 100 times free cash flow. The website building leader continues to steadily grow and is managing to run at a profit along the way, but the price tag gives me pause. I'm personally not going to add to my current position right now. But for investors looking more than a few years down the road, there are far worse places to invest. And with global e-commerce spending honing in on $4 trillion this year, it's clear the web is the future of small business and entrepreneurship. Wix.com deserves to at least be on your watch list.