In the past month, shares of online shopping platform ContextLogic (WISH -0.37%), operating as Wish, are up over 40% on strong volume. The buying frenzy mostly comes from traders in the r/WallStreetBets community, who have identified the company as a "meme stock" due to its eccentric business model and high short-selling interest. Over 7% of the company's shares outstanding are sold short.  

Sometimes, undervalued companies could really use a catalyst to kick-start their share price -- and that time has finally come for Wish after the stock lost nearly 50% of its value since its IPO last December. Should investors bet on the consumer goods company in hopes of doubling up?

Person unpacking delivered goods.

Image source: Getty Images.

What does Wish do?

Wish is essentially a discount digital marketplace featuring merchants selling their (unbranded) goods directly from warehouses in China. The platform is known for long shipping times, items with questionable quality, knock-off brands, and a near-complete lack of customer support. However, it obviously has got quite the charm as the company's monthly active users have held steady at a staggering 100 million since the fourth quarter of 2019.

The secret sauce behind Wish's success is its focus on one thing and one thing only -- offering goods at the lowest possible prices. So, for example, one could purchase a 5'' Android smartphone on Wish for the unbelievable price of $46 ($30 when on sale). Items on sale could receive a discount of nearly 98% of their original value.

There's no catch to it in the form of high shipping fees or upselling features, either. An agreement exists between China Post and the U.S. Postal Service, allowing a special low rate for shipping parcels under 4.4 pounds between the two countries. This means customers can buy products on Wish and have them shipped overseas for less than the cost to ship the same products across state lines.

How do the fundamentals look? 

The pandemic-related spike in e-commerce activities is subsiding as things go back to normal, which is an issue Wish cannot really avoid. As a result, the company anticipates it will grow its sales by just 3% year over year in Q2 to $722.5 million. Moreover, it expects its operating income less non-cash expenses (EBITDA) margin will fall to negative 7.5% from positive 2% in Q2 2020. 

The company is, however, taking steps to address the decline in site traffic. On June 14, it announced a two-year partnership with French open-source e-commerce platform PrestaShop. The deal will allow more than 300,000 PrestaShop merchants to cross-sell their goods to Wish customers. Integration with other e-commerce giants is a potential catalyst for the company's return to growth. 

The verdict

But the greatest problem Wish faces is a clear path to profitability. It spent $470 million in sales and marketing expenses in the first quarter, which is more than its entire gross profit and accounted for 61% of revenue. The company has run into a catch-22 at this point as it needs to attract new buyers for its growth, but those who buy a product based only on low prices will typically only spend very little on the platform anyway.

Breaking even in terms of EBITDA will be pretty tough going forward. Meanwhile, Wish is eroding its $1.6 billion cash balance with a loss of over $300 million per quarter in terms of free cash flow. The stock does seem pretty cheap for what it has to offer at a meager three times price-to-sales (P/S). Unfortunately, it's just not a safe stock to count on over the long term due to a lack of a sustainable business model. It definitely does not look like a stock that will make your financial dreams come true