2021 has been kind so far for investors. The S&P 500 Index, which tracks the performance of 500 large companies in the United States, is up about 18% year to date (YTD), more than doubling the long-term average of 9% annual returns. However, under the hood, a lot of high-growth and tech stocks have been clobbered this year. One of these stocks is Wix.com (WIX 4.06%), which as of this writing is down around 25% YTD, trailing the broad market by 43% this year.
What's going on with Wix stock this year? Is the company struggling, or is this just typical market volatility? Let's investigate.
Wix had disappointing Q2 results
If you look at Wix's yearly stock chart, the big drop came right after the company released its second-quarter earnings results. Revenue grew 34% year over year in the quarter to $316 million, and collections (the actual dollars that Wix collected from customers) grew 29% year over year to $343 million. Wix customers typically buy subscriptions to its website builder for multi-year periods that get paid upfront, so Wix has to defer a lot of revenue in its financial reporting.
Moving down the income statement, Wix's gross margin was 62% in the period. This is lower than it has been historically because of its fast-growing Business Solutions segment, which currently has very low gross margins. Its core website building product, which is under Creative Solutions, had 75% gross margins in Q2, highlighting the strong profitability of this business unit.
Since Wix is still reinvesting for growth, it is right around free cash flow break-even, generating only $14.7 million in the quarter. This shouldn't worry you if you are invested in Wix, but in the coming years, free cash flow will hopefully rise as the business matures.
Overall, it looks like there was nothing to worry about in this Q2 report. So why did investors sell off the stock? It all came down to Wix's guidance for the full year. Management reduced its 2021 collections guidance from $1.44 billion to $1.46 billion down to $1.4 billion to $1.435 billion. While this is only a slight guidance drop, investors are likely worried that Wix is going to see a slowdown in growth coming out of the COVID-19 pandemic.
Wix still has major growth opportunities
As an investor, it is never great when a company lowers its full-year guidance. But if you look at Wix with a longer time frame, then the picture starts looking a lot rosier. Its Business Solutions segment, which encompasses e-commerce tools (similar to Shopify) and other subscriptions for people who want to sell things, grew collections 66% last quarter to $80 million.
A lot of this growth is coming from an increase in gross payment volume (GPV), which management expects to hit $10 billion in 2021, up from $5.4 billion in 2020. A growing mix of its customers are using Wix Payments. This will increase Wix's overall take rate on the payment volume it processes, which should increase this segment's gross margin over time.
Next, Wix is expecting new growth from partnerships it is signing with large businesses. It recently signed an exclusive deal with Vistaprint, the online printing and marketing service for businesses. Wix will now power all of Vistaprint's customers' websites, which management expects to bring in hundreds of thousands of new customers to Wix over the next few years.
The stable growth from Creative Solutions, rapid adoption of Business Solutions, and the signing of this major partnership should help Wix continue to grow revenue and collections at a high rate over the next few years.
Wix's valuation looks better
The combination of the stock being down while the business has grown has brought Wix's valuation to a more reasonable point. With a market cap of $10.4 billion, Wix stock trades at a price-to-sales ratio (P/S) of 7.4 based on the low point of its full-year 2021 collections guidance. With 66% gross margins, this means that Wix will likely have strong free cash flow margins at scale, making this high P/S a lot more manageable than a company with typical gross margins below 50% or 40%.
Plus, with a clear path to growth through the new Vistaprint partnership and the onboarding of new businesses to Business Solutions, it is likely that Wix's annual collections will be much higher a few years from now.
Wix stock has been a stinker this year. But the business is doing just fine. If you're interested in Wix stock, this could be a good time to buy if you plan on holding for the long term.