Shares of Wix.com (WIX 2.17%) fell 17% following the release of its second-quarter financial results on Aug. 4. While the stock has regained some of that lost ground, it's still down almost 40% from its year-to-date high despite a raging bull market.
I'm not surprised by the market's reaction to Wix's latest earnings report, but here are three reasons I'm still holding this stock for the long term.
Data by YCharts.
What went wrong
Wix's second-quarter results exceeded expectations. For example, management had guided for revenue of $312 million on the high end of the range, but it delivered $316 million, an increase of 34% year over year. And for perspective, this was a stronger showing than the 31% growth for its smaller rival, Squarespace.
The problem, therefore, wasn't with the latest quarter but rather its forward guidance. Going into 2021, management provided an outlook for full-year revenue of $1.272 billion to $1.286 billion. Then, after the first quarter, it raised guidance slightly to a range of $1.280 billion to $1.290 billion. However, with the latest report, Wix reduced the range to $1.255 billion to $1.270 billion -- below its original full-year outlook.
And while one could dismiss a relatively small reduction in revenue guidance, Wix lowered its free cash flow (FCF) guidance by a more substantial amount. Originally, management forecasted $60 million to $70 million of FCF for 2021. Now, that metric has fallen to just $35 million to $40 million. With this context, the market's negative reaction is more understandable.
That's what went wrong in the second quarter, but there is still more to this story.
Image source: Getty Images.
1. Ongoing customer acquisition
During the quarter, Wix added roughly 10 million new customers and now has over 210 million total. This continued growth is encouraging considering how much the company spends on sales and marketing. So far in 2021, it has spent 42% of revenue (or 70% of gross profit) on this single line item, making it Wix's costliest expense.
Given how Wix continues to grow its user base, this is money well spent.
2. Customer retention
It's one thing to attract new users, but Wix is adept at retaining users as well, further underscoring why user growth is important for this company. Management breaks out cohort data going back to 2010, showing that every cohort of users has steadily increased spending over time up to the present day.
Part of the reason Wix is able to better monetize users over time is due to its freemium model. Users can get started building their online presence free of charge. But as they grow their blog or e-commerce site, they can upgrade with paid features Wix offers.
This is where Wix really shines -- the company is constantly launching new features and services. For example, in 2021, Wix started offering the ability for users to build apps that integrate with their websites to better engage customers.
To further understand Wix's customer retention, consider the net revenue retention metric. This metric looks at spending from existing users. Some users might spend less while others spend more, but taken together, Wix had a net retention rate of 113% in 2020. This means its existing user base at the end of 2020 was spending $113 for every $100 they spent the prior year. This metric is improving and a good sign for the health of the business.
Because spending from existing cohorts consistently grows, Wix management believes it will generate $15 billion in revenue over the next decade just from existing users -- not bad for a company with a $12.6 billion market cap.
3. Unwavering eyes on the long-term prize
Wix management hopes that within a few years, over half of all new things on the internet will be powered by Wix's software. That long-term goal stands even after lowering guidance following the second quarter. In the earnings release, CFO Lior Shemesh said, "Our ambitions have not changed, and we remain well-positioned to become the primary online platform for all users and businesses."
Accordingly, the company is spending heavily in preparation of robust growth. Circling back to its cash flow guidance, these investments are a drag on FCF right now. The company is spending approximately $30 million this year to build a new headquarters, and it's on a hiring spree, having increased its employee count roughly 10% just from the last quarter.
These three things point to the ongoing health of Wix's business, which is why I remain a happy shareholder.
