Wix Plunged After Earnings -- Should Investors Be Worried?

Wix.com (WIX -0.42%) recently reported its second-quarter earnings, and the market didn't exactly have a favorable reaction to the numbers. In this Fool Live video clip, recorded on Aug. 12, Fool.com contributor Jon Quast discusses the important numbers and takeaways investors need to know. 

Jon Quast: The stock fell 17% yesterday after reported earnings. It was the second quarter. Just to kick this off for Wix, if you don't know, this is a company that basically, their goal is to allow anybody out there to create an online presence. Whatever form that might take, they're the software that's powering that. They have a really interesting model where you can come in for free. It's a big funnel at the top and basically through up-selling and through delivering, they are really hoping that people are going to start paying up for different services and products that they offer.

In the latest quarter, Wix, their revenue is up 34% year over year to $316 million. That was within management's guidance, so kudos to the management team for Wix, they delivered on what they said were going to do. Collections, this is a different term, it's not quite revenue, it's basically money that is coming in. It's subscription, it's on the books, but it's not actually in yet, so it's slightly different from revenue. That was $343 million, up 29% year-over-year. That was also within guidance. So Wix hit their quarterly revenue guidance, their quarterly numbers, they hit it for quarter two.

Where they disappointed the market was their guidance for quarter three. Yeah, the stock is down 40% from it's 52-week high, too. What they did was they had raised their guidance the last quarter for revenue, and then in this quarter they had to lower it below what the initial guidance was. Basically, for the year, this year, they are expecting $1.26 [billion] to $1.27 billion in revenue, and that would be 27% to 28% year-over-year revenue growth. Right there, you can see they didn't lower their guidance by very much on the top-line, only 1.5%, but this is a deceleration of the revenue growth rate that they just enjoyed.

But I think what really got people was the lowering of the free cash flow guidance. Right now for this year they're guiding for $35 [million] to $40 million in free cash flow. That is lowering the guidance by 44% of what they previously thought they were going to do in free cash flow. What is going on? How should investors think about this? What is going on with Wix? For me, this is a company that is still growing by leaps and bounds. OK?  27% to 28% revenue growth is still very impressive.

What I really like is that Wix is building something big for the future. Like this year, they're spending $30 million on building out a brand new headquarters that's going to support their future growth. They've also grown their employee count 10% over just the last three months. They are hiring a bunch of people right now in anticipation of having a much larger business than it is today. That is a drag on their profitability right now, definitely is. But if they achieve their ambitions, it's very much needed.

What is their ambition? They want to be the platform on which the majority of people will build their online presence. They are honestly shooting for over 50% of anything created online, being powered by Wix's platform. I think that's a very big goal. When you think about that in evaluating the long-term thesis, we're not looking at just one quarter, we're looking five, seven, 10 years down the road.

What are they shooting toward? I think here is some things that you need to keep in mind for evaluating Wix. In the last quarter, they registered about 10 million new users. That is something that is very good for the long-term. They're now over 210 million registered users. One of the things that I like too is that they have a knack of getting customers to spend more over time. They, like a SaaS [software-s-a-service] company, talk about net revenue retention. In the most recent quarter it was 113%. For every dollar that people spent a year-ago, they're spending a $1.13 now. Really, it's a sign of optionality. I can't tell you from memory how many products and services Wix is offering right now, because it's so many things and they're constantly having more things added. That's what really allows them to continue to upsell to their customers.

One of the things that really stands out to me, they always show this in their slide shows, is that all of their cohorts of users have continued to increase how much they're spending on the platform over time. You go back 10 years, that batch of cohorts is still increasing their spending on Wix's platform. So they have incredible user retention. As they look out over the next 10 years, they predict that they're going to have in revenue $15 billion just from their existing customers. Now, that's over the next 10-years, not in 10 years, $15 billion, but over the next 10 years generating $15 billion just from their existing customers, not counting any new customers that they add. This is only a $12 billion market cap. So for me, this is a really interesting company, they're really building something big.

Yes, guidance is down a little bit. They said that the rising cases of COVID-19 is just putting some people in some confusion. They don't know whether to start a business or whether they should hold off a little bit longer. It's just messing it up a little bit. But long term, they're still building toward something pretty impressive.