ContextLogic (NASDAQ:WISH), the parent company of the e-commerce company Wish, recently posted its third-quarter earnings report.

Wish's revenue declined 39% year-over-year to $368 million, which missed estimates by $6 million. However, its net loss narrowed from $99 million to $64 million, or $0.10 per share, which beat expectations by a nickel.

Wish didn't provide any exact guidance, but warned that its revenue would decline sequentially in the fourth quarter even after factoring in holiday sales. It also announced that its founder and CEO Piotr Szulczewski would step down next February but remain on the company's board.

That was a lot of a bad news to process, but could Wish's battered stock -- which trades at just one times its trailing sales and roughly 80% below its IPO price -- actually be a contrarian play?

Tiny parcels on a laptop keyboard.

Image source: Getty Images.

A discount marketplace with major problems

When Wish went public last December, it served over 100 million monthly active users (MAUs) with its discount marketplace, which mainly enabled Chinese merchants to sell their products to overseas buyers.

Wish sold many of its products at lower prices than regional marketplaces like Amazon, but customers had to wait much longer for their products to arrive. Wish's dependence on Chinese merchants also exposed its shoppers to low-quality and fake products, and it took a long time to process returns. To top it off, the trade war, tariffs, and logistics challenges also exposed Wish to significantly more challenges than larger e-commerce companies.

When Wish went public last December, some investors were willing to overlook those flaws and focus on its growth in MAUs and revenue. Unfortunately, its revenue fell sharply over the past three quarters, and it ended the third quarter with just 60 million   MAUs:

Growth (YOY)

FY 2019

FY 2020

Q1 2021

Q2 2021

Q3 2021

MAUs

23%

19%

(7%)

(22%)

(39%)

Revenue

10%

34%

75%

(6%)

(40%)

Source: ContextLogic. YOY = Year-over-year.

Wish's last 12-month (LTM) active buyers also fell 32% year-over-year to 46 million during the third quarter. It attributed its ongoing loss of active users, which it expects to bleed into the holidays, to its lower spending on digital ads.

Wish says it's reining in its marketing efforts to cut costs and focus on retaining its higher-value users with new features -- which include its shoppable "Wish Clip" videos, its new buy now, pay later (BNPL) options with Klarna, and its "Wish Standards" program, which rewards its higher-quality merchants with lower commissions and prioritized product listings.

However, I'm still skeptical any of those efforts will stop Wish's bleeding. Wish has traditionally relied on bottom-fishing bargain hunters, and it seems highly doubtful that new videos, payment options, and stricter rules for merchants will keep them locked into its marketplace.

As Wish fades away, other similar platforms -- especially Alibaba's (NYSE:BABA) AliExpress -- will likely inherit its shoppers. AliExpress, which also enables Chinese merchants to sell their products to overseas buyers, already reaches over 150 million active buyers worldwide.

Finding the silver lining

Wish faces some serious near-term challenges, but its financial discipline is gradually improving. On an adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) basis, its loss of $30 million marked a significant improvement from a loss of $64 million a year earlier, while its adjusted EBITDA margin rose from negative 11% to negative 8%.

Wish also won't run out of cash anytime soon. It ended the third quarter with $1.2 billion in cash, cash equivalents, and marketable securities, and it expects its free cash flow (FCF) to remain near breakeven levels this year.

Other potential catalysts for the stock include a short squeeze or a buyout. Nearly 30% of Wish's shares were being shorted at the end of October, so any positive news could spark a major rally.

Wish's low enterprise value of $1.5 billion might also make it a buyout target for a larger retailer or a fintech company like PayPal -- which was reportedly interested in buying Pinterest to expand its presence in the social commerce space. Those rumors could also spark a short squeeze. 

Should you buy Wish?

Wish isn't doomed yet, but I still wouldn't buy the stock. Its low valuation and high short interest might limit its downside potential at these levels, but there also aren't any compelling reasons for the stock to rally. Investors who are looking for undervalued e-commerce stocks should consider buying Coupang or JD.com, which both operate much stronger businesses, instead of Wish.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.