E-commerce unicorn Wish -- trading under parent company ContextLogic (WISH 2.22%) -- had one of 2020's most disappointing market debuts. Shares fell 16% on opening day following the IPO, despite hopes the company could one day rival Amazon. The stock trades at $27.10 as of this writing, slightly above its IPO price of $24.

Backed by prominent investors such as DST Global -- an early investor in Facebook and Twitter -- and Peter Thiel, Wish had all the trappings of a rising star. So what happened?

According to The Wall Street Journal, analysts think this lackluster start could've been due to the public's lack of familiarity with the Wish brand. But given time, could Wish grow into the likes of Amazon and Alibaba? It's still early days, but the company is smartly positioning itself for the future.

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The Wish business model

Founded in 2010, Wish is a global e-commerce platform that generates revenue by charging merchants a commission on sales made in its marketplace. The company also generates fees by offering advertising and logistics services to its merchants. With a range of beauty, clothing, and electronics products sold at wholesale prices, Wish has managed to garner a user base of 100 million monthly active users (MAUs) and 500,000 merchants.

Wish targets value-conscious shoppers with incomes below $75,000 per year. This segment accounts for 44% and 85%, respectively, of U.S. and European consumers. Unlike wealthier shoppers, this group of customers is extremely price sensitive and doesn't have as much regard for convenience and branding.

Borrowing a page from Pinduoduo, China's second-largest e-commerce player by active buyers, Wish gamifies the shopping experience, using features like sweepstakes to keep customers coming back. The similarities don't end there. Like Pinduoduo, Wish has adopted a mobile-first strategy. Its discovery-based shopping experience leverages user-generated content like photos, videos, and reviews -- as well as extensive data science capabilities -- to engage and grow its user base.

If numbers are anything to go by, shoppers seem to like this approach. Between 2015 and 2019, revenue rose more than tenfold from $144 million to $1.90 billion, driven by the growth of "active buyers" -- shoppers who made at least one purchase over a 12-month period -- from 18 million to 62 million.

Attractive long-term prospects

While Wish has had a stellar run so far, there's much to suggest its best days lie ahead.

For one, there is still an immense, untapped opportunity in e-commerce. By 2024, this market is expected to be worth $4.5 trillion -- that's more than double what it was in 2019, according to eMarketer forecasts cited in the Wish IPO prospectus.

With a global footprint, Wish allows its merchants to sell to over 100 countries via a single product listing. The company is in prime position to capture e-commerce growth, and with its focus on lower-income shoppers, Wish can serve a market of over one billion households, even excluding customers in China and India. To keep things in perspective, recall that Wish currently has only about 100 million MAUs.

While the company will want to acquire new shoppers from within its large target market, it can also convert more of its existing 100 million MAUs into monthly active buyers, of which it has just 12 million. To do that, Wish can expand its product categories or boost user engagement by offering more personalized items and discounts to encourage more frequent purchases.

Still, all of the above will work only if Wish keeps attracting and retaining high-quality merchants. With more merchants comes a broader product selection, making it easier to attract and retain shoppers, and the network effects become obvious. To support this effort, Wish launched Wish Local in 2019 to help brick-and-mortar stores upload their inventory onto its platform.

With Wish Local, customers can order items and pick them up in store, while merchant partners have the opportunity to advertise on the marketplace. And Wish itself benefits by expanding the reach of its fulfillment network without investing in expensive infrastructure. As of the IPO, there were 50,000 Wish Local partners in 50 countries.

Competition and risk

For all that's going in the company's favor, e-commerce is a notoriously competitive industry. Wish has to compete for shoppers with giant, established names like Amazon, eBay, Etsy, and other players around the world. 

Against this backdrop, Wish spends a lot on customer acquisition. This explains its massive marketing expenses -- 64% of revenue in first three quarters in 2020 -- and the company's history of red ink on the bottom line. Revenue was up 32% in that same period, but the company's net loss surged year over year from $12 million to $176 million.

Cross-border e-commerce has also been slower to gain traction compared with local e-commerce (think Amazon Prime), as a result of logistics challenges and shortcomings in payments infrastructure. Though Wish has reduced these costs, there are still unsolved issues. For example, imagine the hassle a U.S. buyer has to go through when returning a product to a China-based merchant. The process will likely be long and messy. Language could also pose a challenge, despite translation tools being available.

Clearly, the same process would be much easier if the merchant is a local seller. While Wish's customers are generally willing to trade convenience for affordability, many shoppers won't -- and this could cap the company's growth potential.

For Wish to win sizable market share in worldwide e-commerce, it will have to fight off well-entrenched incumbents. Only time will tell if Wish lives up to investors' high expectations with shares trading for eight times trailing 12-month revenue as of this writing. Risk-averse investors are best off monitoring the company's performance in the coming quarters before making any investment decision.