Here's Why Wix's Business Model Is So Powerful

Israel-based Wix.com (WIX -0.30%) is a company that makes it simple and easy to create an online presence. The stock has been a fantastic performer over the past five years, more than quadrupling investors' money over that time. However, it's stumbled lately and is now down 45% from its all-time high as of this writing.

Fool contributor Jon Quast is feeling the pain. But in this clip from Motley Fool Backstage Pass, recorded on Oct. 8, Jon explains to Millionacres editor Deidre Woollard and fellow Fool contributor Jason Hall his investing thesis for the company. And this thesis is why he made Wix stock a major part of his portfolio.

Deidre Woollard: Jon, I know that you are a Wix investor. Tell us your story.

Jon Quast: Yeah, it's fortuitous that we decided to cover this stock today because it is real. I'm not going to have to make-believe that I'm an owner of this stock for our show. I really do own Wix stock. It is actually my highest cost basis in my retirement portfolio. Meaning, I have invested more dollars in Wix stock than I have in any other stock.

Woollard: Oh, boy. [laughs]

Quast: Why? Why did I do this? Well, here's a simple thesis for Wix.com. One, content creation online is a huge market, and I only see it getting bigger over time. More and more people are needing that digital presence, whether it's a business or personal, and Wix is a tool to help create that online presence easily. I see the market as big.

As far as Wix goes, I agree with you in the sense of, I also don't personally find Wix sites to be aesthetically pleasing to me. However, what makes it interesting is that it removes the friction for user acquisition with its freemium model. So free-to-start, you can pay for services over time. I found that that was really big when I lived in South America, and that's when I first came across Wix. A lot of people in my circle of friends in South America were starting their online businesses with Wix because it was free, and paying over time. So that was really an interesting business model.

What I'd also like about Wix and why I bought the stock is because it has so much optionality. We've seen it play out, is that they just continue to launch more and more products. It's almost like throwing spaghetti at the wall and seeing what sticks. It seems like every week, they're having some new product announcement. But what is interesting is that's just a lot of levers that might entice somebody to go from that free to the paid, and over time, we've seen that happen a lot.

We've seen people upgrade from those free accounts to the paid accounts. They tend to be very, very sticky. Users tend to keep paying for Wix and continue spending more over time. Love that.

That translates into strong recurring revenue and free cash flow for this company.

All of these things I really liked and why I allocated so much dollars to it. Did the typical buying in thirds, like we say, dollar-cost averaging, spread out my investment. Actually, I look just before the show. It's my highest cost basis. It is my fourth-worst performer, I'm down 33%. Definitely thinking about this.

Jason Hall: Ouch.

Quast: Yeah. Ouch, right?

Hall: Yeah.

Woollard: You said something interesting about the freemium model because I used to work in real estate, I used to train real estate agents. A lot of them came in with Wix sites, and even if they didn't like everything about their site, once they were in and once they were paying for it, it was nearly impossible for me to get them to switch it. I'd be trying to switch them to our in-house thing, which will be completely free for them. They didn't want to deal with moving all of their stuff.

And I think that's going on with Wix and Squarespace. Part of the reason these businesses are so attractive is moving your website and all of your e-commerce and all of that stuff, it's like moving your house.

Hall: Like changing banks or moving, it's the same.

Woollard: You don't want to do it if there's not really a compelling reason to.

Hall: I think that's very much the case, and it's interesting, too. We'll get into it more as we work through this. That freemium model, it exists for a reason. It's not just a loss leader when these companies have a website that's free for the user, for the customer because there's advertisement, there's value. Because it's got that name on it. Deidre, you were talking about it. Wix talks about they expect that more than half of their premium subscriptions come from free-traffic sources, and one of their biggest free-traffic sources, is people that see the Wix name on somebody else's website, that's not paying for it.