Wix.com (NASDAQ:WIX), known for providing individuals and small businesses with the ability to create websites without technical expertise, saw its stock take a hit after second-quarter earnings were released on Aug. 10. After hovering around $300 per share in the weeks before earnings, the stock price dropped to a 52-week low of $171.37 as recently as Oct. 6.
The price drop followed the company's announcement that it's reducing 2021 full-year guidance. Does the decline in share price signal a buy opportunity, or is Wix a company to avoid?
To answer that question, let's look at the firm's current performance and its prospects. Then we can determine if Wix is a worthwhile investment over the long run.
The state of Wix today
Wix generates revenue using a software-as-a-service (SaaS) model, where customers pay a monthly subscription for its products and services. These offerings range from website creation to email marketing. The SaaS approach provides reliable recurring revenue.
The company benefited from the pandemic's stay-at-home requirements, which forced many small businesses to focus on online sales. Wix saw its 2020 revenue rise to $988.8 million from $761.1 million in 2019. But even before the pandemic, it had steadily grown revenue for years.
That's why Wix's guidance downgrade is a concerning sign. It generated $316 million in second-quarter revenue. In the third quarter, the company expects revenue to come in between $311 million and $317 million, around the same as the second quarter.
CFO Lior Shemesh explained the lower guidance by stating, "We did face more headwinds in the back half of the quarter than we expected" due to a slowdown in people joining Wix in the second quarter. The company attributed this slowdown to customer uncertainty over how the pandemic would progress.
It will take time to see if slowing user growth continues. But even with reduced guidance, the third quarter's forecast revenue will be a double-digit increase over last year's $254.2 million. And Wix expects full-year revenue of at least $1.255 billion in 2021, a solid increase from 2020's $988.8 million.
Understandably, the reduced guidance raises questions about Wix's future. Are the company's years of steady growth finally winding down?
If its core freemium model (where customers can create a free website, then move to a subscription plan for more features) begins to show reduced customer growth, Wix has several opportunities to continue revenue expansion.
At the end of 2020, North America generated nearly 60% of its revenue. This heavy domestic emphasis allows Wix to boost its revenue growth by expanding into other geographies.
Payment processing is another growth area. Wix is not simply offering e-commerce functionality in its websites. The company is also delivering offline point-of-sale capabilities to those with brick-and-mortar locations, making Wix a holistic solution for small businesses. It's all under the umbrella of Payments by Wix.
The company doesn't break out revenue for Payments by Wix. Instead, it falls under its Business Solutions segment, where second-quarter revenue was up 75% year over year. During the company's second-quarter earnings call, CEO Avishai Abrahami noted, "E-commerce as a percentage of our business has grown." Business Solutions only represent 25% of total second-quarter revenue, but that's up from 19% last year.
The company is also looking for partnerships to extend its reach. It signed an agreement with Vistaprint, a part of Cimpress (NASDAQ:CMPR), in August. Vistaprint will offer the Wix platform to its more than 17 million customers, giving Wix access to a large established customer base.
Wix stock: To buy or not to buy?
The drop in company guidance might feel concerning on the surface, but it makes sense in the context of Wix adjusting for the continued uncertainty injected by the ongoing pandemic. This uncertainty will pass with time.
It's worth noting Wix operated at a net loss of $22.9 million through the first half of 2021, but this is an improvement over the prior year's net loss of $96.9 million. Also, many tech companies operate at a loss for years to fund growth before becoming profitable.
The company's balance sheet is solid. Its total assets of $2.1 billion exceed total liabilities of $1.8 billion. Wix is also generating consistent free cash flow. It had free cash flow of $14.7 million in the second quarter and $14.6 million in the first. The company ended 2020 with $129.2 million in free cash flow, up from 2019's $127.5 million.
Wix is performing well financially today. Even with the reduced guidance, management expects at least 27% year-over-year growth in 2021. Moreover, the company has plenty of areas to fuel continued growth. These factors make it a worthwhile investment with upside potential for years to come.