E-Commerce and Work-From-Home Stock Wix.com Is Still a Buy

Shares of Wix.com (WIX 2.17%) are down over 20% from their all-time high as of this writing. The website-building and e-commerce company has been dragged down by optimism surrounding progress on a COVID-19 vaccine -- specifically, the idea that eliminating the novel coronavirus could dampen demand for digital tools like Wix. No complaints from me there. A quarterly loss during Wix's third quarter didn't help either.

But looking further down the road, the reasons for long-term optimism surrounding Wix remain unchanged -- vaccine, quarterly loss, or otherwise.

Image source: Getty Images.

Don't overlook the positives in Q3

Wix was able to maintain its momentum from the first half of 2020 during the summer. Revenue of $254 million was up 29% year over year and easily surpassed management's guidance, which was provided a few months ago as businesses both old and new flocked to the platform to get their operations up-to-date with the digital times we live in. 

Some investors chose to focus on the widening net losses racked up during the period, though. On an unadjusted basis, net losses were $56.8 million, compared to net losses of just $17.4 million a year ago. The culprits? Higher sales and marketing costs, financing expenses related to the issuance of $500 million in convertible debt back in August, and higher stock-based compensation. However, free cash flow (basic profitability measured as revenue minus cash-only operating and capital expenses) was positive $19.4 million, down 34% from the same period in 2019 but nonetheless better than management had forecast it to be.

Through the first nine months of 2020, the fast shifts to e-commerce, work from home, and self employment amid the pandemic are working wonders for Wix as millions of new users sign up for the company's website-building and business management services.

Data source: Wix.com. 

E-commerce is a very long secular growth trend

Of particular interest here is the acceleration in premium subscribers during the third quarter. Wix added 20% more compared to a year ago, up from a 16% increase in the second quarter. There has been some lingering worry out there that e-commerce platforms like Wix and its much larger peer Shopify might lose some steam as the pandemic wears on, but so far, that hasn't been the case. While it isn't an apples-to-apples comparison because of its logistics business, Shopify also enjoyed resilient momentum in Q3 with its subscription solutions revenue increasing 48% year-over-year due to more small business sign-ups. 

I have begun to think the real challenge for Wix and similar companies won't be from the ongoing effects of the pandemic itself, nor from an eventual end to the pandemic. Instead, the real challenge will come when Wix and its fellow e-commerce peers start to lap surges in activity on their platforms in 2021. I expect growth rates to begin moderating by a much more pronounced rate at that point, though that year-over-year comparison won't begin to occur until March 2021 (and won't be reported until early summer 2021). 

For now, though, the good times are still rolling at Wix. The company says it expects revenue to accelerate again during the final quarter of the year and notch no less than a 30% growth rate compared to 2019. Free cash flow is expected to dip again due to higher expenses in support of growth, ending the year flat compared with 2019. 

I have a small position in Wix for the long haul, because e-commerce is an endurance race that will last for a very long time, not a sprint that will be over and done with in 2020 (or 2021, if there is in fact some extra turbulence next year like I think there will be). And Wix is in excellent shape for the coming endurance contest. It ended September with $998 million in cash and short-term investments, another $540 million in longer-term marketable securities, and convertible debt of $823 million. 

The stock currently trades for 15 times trailing 12-month sales and 95 times free cash flow -- premiums that imply plenty of growth left ahead and reflect the higher cash outflow this year to support expansion. But after the recent dip in the stock and a positive third-quarter report card, I'll consider scooping up a few more shares.