Wix.com (NASDAQ:WIX) is a company that helps its users build an online presence with easy-to-use software tools. With over 210 million registered users, I believe it's fair to say the company's products are resonating with consumers. But there was a red flag in its most recent quarter. The tech company didn't attract as many new users as it anticipated.
In this video from Motley Fool Backstage Pass, recorded on Oct. 8, Millionacres editor Deidre Woollard and Fool contributors Jason Hall and Jon Quast discuss what might be going on. Importantly, they note that this reduction in new users corresponded to a decrease in marketing spend. In the second quarter of 2020, Wix spent 43% of collections on marketing, whereas in the second quarter of this year, it spent just 33%.
Deidre Woollard: In Wix's shareholder letter, they said beginning in mid-May, they experienced two trends that caused subscriptions to finish at the low end of their prediction. The first one was production in new user traffic at the top of the funnel. Second one was faster conversion that occurred in 2020 from their existing cohorts that created greater pull-forward effect in Q2.
The question is, the second one doesn't bother me, but the first one, they didn't really have an answer for that, the reduction in new user traffic at the top of the funnel. Does that mean they need to spend more on marketing? I wasn't really sure exactly how they were going to fix that particular problem.
Jason Hall: I don't want to say it's concerning, but that's the thing that you have to start paying more attention to. Jon, I'd love for you to weigh in if you have any thoughts on this.
Jon Quast: Well, it corresponds to what you were showing earlier with the reduction in the marketing spend as a percentage of revenue in the most recent quarter. It would suggest that even though they pulled back that spending, they really can't. They really need to get that back up to historical levels if they want to maintain that acquisition at the top of the funnel. Granted, one quarter does not make a trend. But it would be the suggestion at this point.
Hall: I'll posit one other alternative as well. Think about online gaming stocks, app-based companies, social media platforms, Pinterest, for example. A lot of these companies have reported reduced activity more recently. Maybe it's a similar thing that's happening and it's just going to prove transitory. We don't know. Right, Jon? I think to your point, we don't know the answer to that yet. The worst-case scenario is probably their ability to flex those sales-and-marketing expenses is probably less than maybe we would expect.