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This Meme Stock Is Not Like the Others

By Jeremy Bowman - Updated Jun 23, 2021 at 10:33AM

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A fast-growing e-commerce company has caught a tailwind from Reddit investors.

Meme stocks have taken over the market this year.

Names like GameStop and AMC Entertainment Holdings have caught fire as millions of retail investors on Reddit and other social media platforms have plowed into the stocks seeking to execute a short squeeze and pump up the shares with memes and trending hashtags. Those two stocks have been the biggest winners, but plenty of others have gotten boosts from the Reddit crowd, including BlackBerryBed Bath and BeyondExpressKoss, and Clover Health.

These meme stocks generally have one thing in common: They're weak companies. Almost all of them are growing slowly or losing money. They're mainly consumer brands that have faded from their peak. 

However, one meme stock that's taken off recently is a much different kind of company. Recent IPO ContextLogic (WISH 2.87%) -- better known as Wish, the mobile e-commerce platform it operates -- has soared 70% since the start of June on extraordinarily high volume. Back in the spring, only about 5 million shares of Wish were changing hands each day, but on June 21, daily volume reached 335 million. 

Unlike most meme stocks, Wish is growing rapidly and commands a steep valuation. Is the WallStreetBets crowd on to something here? Let's look at what Wish has to offer.

A woman holding a credit card while looking at her computer in bed

Image source: Getty Images.

Make a Wish

Founded in 2010, Wish has ramped up quickly and reported 34% revenue growth in 2020 to $2.5 billion. In a crowded e-commerce field, the company aims to distinguish itself by democratizing mobile commerce with a discovery-based, personalized, and entertaining platform. Wish's business model seems to borrow from brick-and-mortar retailers like Five Below, offering a whimsical shopping experience on deeply discounted items, among other products. And it mimics social commerce platforms like Pinduoduo by trying to make shopping fun, offering sweepstakes and little prizes for engaging with the platform.

The company is also building out complementary businesses like logistics, fortifying itself much in the same way Amazon has. In the first quarter, logistics revenue exploded by 338% to $245 million, which lifted overall revenue by 75% to $772 million. The company is also innovating with programs like Wish Local, which allows small, independent stores to upload all of their inventory onto Wish's website. This has allowed it to capitalize on the large base of brick-and-mortar merchants.

The company is also operating at a loss as it invests in long-term growth. 

Should you buy Wish stock?

ContextLogic lacks many of the typical hallmarks of a meme stock, but it does have some things in common with the most popular stocks on WallStreetBets. Wish has attracted attention from short-sellers (16% of its float was sold short as of the end of May), and its lackluster performance in the first months after its IPO likely attracted attention from the bargain-hunting retail investors populating WallStreetBets.

Compared to most growth stocks, Wish looks very reasonably priced at a price-to-sales ratio around 3, on par with other e-commerce companies like Stitch FixWayfair, and even Amazon.

The big question for Wish in the coming years: Will the company be able to turn a profit? Its current business model requires aggressive spending on giveaways and enticements for new customers, and it could be difficult to scale back on those expenses once customers are used to those kinds of rewards.

Wish's business model still seems unproven, and its claim that scale and data science are central to its competitive advantage might not be accurate as the company competes with Amazon, which is a master of both scale and data science.

For investors looking for meme stocks, you could do worse than Wish. But given the challenges it faces in turning profitable and differentiating itself in e-commerce, it seems like the stock is best watched from the sidelines for now. In the short term, WallStreetBets volatility looks set to continue.  

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Jeremy Bowman owns shares of Amazon and Stitch Fix. The Motley Fool owns shares of and recommends Amazon and Stitch Fix. The Motley Fool recommends BlackBerry, Five Below, and Wayfair and recommends the following options: long January 2022 $1,920 calls on Amazon, long January 2022 $115 calls on Five Below, short January 2022 $1,940 calls on Amazon, and short January 2022 $120 calls on Five Below. The Motley Fool has a disclosure policy.

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Stocks Mentioned

ContextLogic Inc. Stock Quote
ContextLogic Inc.
$1.79 (2.87%) $0.05, Inc. Stock Quote, Inc.
$140.80 (-1.24%) $-1.77
Five Below, Inc. Stock Quote
Five Below, Inc.
$138.56 (0.69%) $0.95
Wayfair Inc. Stock Quote
Wayfair Inc.
$62.31 (-0.95%) $0.60
StitchFix Stock Quote
$6.39 (-1.39%) $0.09
Pinduoduo Stock Quote
$50.25 (-1.97%) $-1.01

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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