ContextLogic (WISH +0.00%), otherwise known as Wish, is an e-commerce platform that helps customers find items at bargain-bin prices. The company went public through an initial public offering (IPO) at $24 a share last December, but the stock has since taken a tumble, and is now down 54.5% since then. Like the items on its platform, shares of Wish now trade at a discounted valuation.
Is Wish an e-commerce stock destined for success, following in the footsteps of Etsy (ETSY +0.20%), Amazon (AMZN +3.50%), and Shopify (SHOP +2.52%)? Or is it headed for the dustbin, like many start-ups that came before it? Let's take a look.
Image source: Getty Images.
The business model
Wish is an e-commerce website and mobile application focused on offering a personalized and social shopping experience for customers looking for discounted items. Instead of focusing on search, like most other e-commerce platforms, Wish users browse a personalized feed of items based on their past buying behavior (there is a search function included if you are looking for a specific item).
The value proposition is that Wish can help customers find products they want at bargain-bin prices, while also matching the 1 million merchants on the platform with potential buyers.
The company makes money in three ways. First is from its core marketplace segment, where it gets commission fees when a product is bought and sold on Wish. The product boost segment is the advertising revenue Wish gets when merchants pay to have their products promoted to users.
Lastly, logistics revenue is when merchants pay Wish to help manage fulfillment and delivery of their products. Since the majority of Wish merchants are located in China but most of its shoppers are located in North America and Europe, helping out with logistics is an important value add that Wish brings to the table.
Last quarter, Wish had $772 million in sales, up 75% from 2020. Core marketplace (the commission fees) is the majority of Wish's revenue, at $477 million in Q1, but the logistics segment is growing rapidly, up 338% in Q1 to $245 million. If logistics keeps up anywhere near its current growth rate, it will be the majority of Wish's revenue in the near future. Product boost revenue was $50 million in Q1, making it the company's smallest operating segment.
The valuation is reasonable
At a market cap of $5.5 billion and with trailing 12-month sales of $2.87 billion, Wish currently trades at a price-to-sales ratio (P/S) of 1.9. Considering that the company had a gross margin of 61% over that time period, this P/S looks cheap relative to Wish's potential earnings power.
However, gross margin has been coming down over the last few quarters due to the rise in logistics revenue, which has lower margins compared to its two other business lines. Investors should expect this gross margin decline to continue if the logistics segment grows faster than overall sales.
Wish is also unprofitable, with a $128 million net loss in Q1 alone. It should be noted that the company does have $1.6 billion in cash and no debt thanks to its IPO, so it does have a lot of room to lose money while it scales the platform. Eventually, it will have to turn a profit though.
The business isn't perfect
While Wish's revenue growth and trailing valuation numbers look reasonable, it does have some potential problems looming with its business. The number of customers who have placed an order on Wish over the last 12 months, or what it calls LTM Buyers, dipped 7% in Q1 to 61 million. That is a concerning trend in customer churn, especially when you consider that LTM Buyers have stagnated since 2018 when the number was 64 million.
Wish also spends a ton of money each quarter on sales and marketing, at 60% of revenue in Q1. This was down from the same time last year, when marketing expense was 67% of revenue, so the numbers are heading in the right direction, but investors have to be concerned that Wish has to spend so much money marketing its platform while at the same time not growing its user base.
Another long-term problem for Wish could come from the number of counterfeit goods on the platform. The majority of Wish's merchants are located in China, and customers have complained about the prevalence of counterfeit goods on the platform. This could change, but it does put a potential dent in the brand value Wish is trying to build with its users.
So is it a buy?
Wish is an e-commerce platform facing immense competition from the likes of Amazon, Walmart (WMT +3.78%), Etsy, and many other retailers across the globe. It's also currently burning tons of cash due to its high sales and marketing spend. With that being said, the company is growing its top line, specifically with its logistics business, at an impressive rate, and it looks like it is slowly seeing some operating leverage as it scales.
Wish isn't a perfect business, but at a P/S below two and with $1.6 billion in cash on its balance sheet, the market is heavily discounting this company's future prospects. If you think Wish can meaningfully grow its business from here and eventually start generating profits, now could be the time to take a position in the stock.
