Online retailer Wish -- which trades as ContextLogic (WISH -5.66%) -- must be wishing it could take a mulligan. Wish reported a huge earnings miss last week, and shares crashed over 20% following the announcement. 

At $6.87, the stock is down more than 60% year to date and far below its $24 initial public offering price. Clearly, investors in Wish -- including me -- are disappointed with how things have turned out.

But beyond the headlines, Wish's latest earnings release offers some reasons to be hopeful. So let's take a closer look at Wish's results -- and what could lie ahead for this company.

A person smiles and looks at a smartphone.

Image source: Getty Images.

What went wrong for Wish

Wish posted revenue of $656 million for the second quarter of 2021, down 6% year over year. Wish reported a loss of $67 million on an adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) basis, compared to a profit of $16 million a year ago. Both top-line and bottom-line figures missed Wish's guidance of $715 million in revenue and adjusted EBITDA of negative $60 million.

For investors, that's a shocking turn of events. After all, Wish had posted a 75% revenue surge in the first quarter of 2021, beating management and street forecasts.

So what went wrong? For a start, the global economy is gradually reopening thanks to rising vaccination rates. As a result, consumers are spending less time at home, leading to a slowdown in online shopping. For Wish, this meant fewer app installs, declining daily user activity, and lower sales.

On top of declining user engagement, the cost of digital ads -- a key driver of sales for Wish -- surged during the quarter. Wish says this was because Apple's privacy updates pushed marketers to spend more on ads targeting Android users, intensifying competition for ad space. That was bad news for Wish. The company's ads have historically targeted Android users, given that they make up the bulk of its customers. Moreover, Wish uses data-driven algorithms to manage its ad spend -- and these algorithms are designed to chase a higher return on the marketing investment. Unfortunately, rising ad costs meant this strategy was no longer as efficient as it once was. So Wish's algorithms reacted by slashing the amount it spent on ads. This dented user growth and crippled Wish's ability to engage its existing users. 

Coupled with reopening headwinds, the pullback in ad spend led to a 13% drop in app installs, along with a 15% decrease in time spent on Wish. In turn, this resulted in a 22% drop in monthly active users to 90 million. Furthermore, active buyers -- users who bought at least one product during the quarter -- plunged 44% to 17 million.

A silver lining

All in all, this was an extremely challenging quarter for Wish. But it's not all doom and gloom for this company.

Despite the drop in engagement and user metrics, Wish's revenue per buyer rose to $22, up 21% from a year ago. In other words, while fewer customers spent time and money on Wish, those who did use the platform spent more. This suggests Wish may have struck a chord among its biggest fans -- and that's a positive sign. The question is whether Wish can build on this success and convert more users into loyal ones.

Another bright spot for Wish was its logistics division, which aims to provide merchants with a cost-effective and reliable way to deliver products to international customers. Revenue at this segment jumped 126% to $228 million, driven by surging demand from merchants in Wish's network. Wish's Local service -- a network of 60,000 brick-and-mortar stores linked to Wish's online marketplace -- also showed signs of growth. Orders shipped to Local partners made up about 10% of Wish's total orders, up from 7% three months ago.

What's next for Wish

Wish is not taking its challenges lying down. Instead, the company is taking radical steps to improve user engagement and retention, aiming to return to growth sooner rather than later.

For a start, Wish plans to introduce more globally recognized brands onto its marketplace. It is also overhauling its algorithms to prioritize products and merchants with more positive user ratings, boosting the quality of products sold on its platform. Wish also wants to improve its user experience by rolling out social commerce and entertaining features such as live-streaming and video reviews. Lifting a page from the playbooks of social commerce specialists like Pinduoduo and Douyin could help Wish retain existing shoppers -- and attract new ones.

To achieve these goals, Wish will draw on its increasingly deep bench of experienced leaders. For example, the company recently named former Alphabet executives Farhang Kassaei and Tarun Jain as chief technology officer and chief product officer. A former senior director of software engineering at Alphabet's Google unit, Kassaei has also spent time at eBay, where he was the chief architect of the marketplace. Jain was most recently director of product management at Google, where he worked on YouTube's and Gmail's ad platforms. By bringing in these two seasoned tech executives, Wish may have a better shot at success.

What Wish investors should look for

But all these initiatives will take time. Wish does not think its efforts will yield fruit until the second half of 2022, so investors will have to exercise patience. In fact, Wish expects its performance to deteriorate in the third quarter -- thanks to the cutback in ad spending. Quarter-to-date revenue in July 2021 is already down 40% year over year -- and Wish is guiding for an adjusted EBITDA loss in the third quarter of between $65 million and $70 million.

As an investor in Wish, I'm not satisfied with its recent performance. Still, if this journey plays out as Wish hopes it will, the company could emerge in a stronger position. To see if Wish can pull this off, I'll be keeping an eye on its user growth metrics -- such as MAUs and active buyers -- over the next few quarters. This will give me a better idea of whether Wish is on the road to success.