ContextLogic (WISH -2.52%), the parent company of the e-commerce platform Wish, went public at $24 per share nearly a year ago. On Dec. 3, its shares slumped to an all-time low of $3.15.
Wish's stock tumbled as its growth and active buyers decelerated. However, some contrarian investors might still see some value in the battered stock as it trades at less than its trailing sales.
They'll also likely point out that Wish has been narrowing its losses and rolling out new features -- like shoppable videos and "buy now, pay later" (BNPL) options -- to attract new merchants and shoppers. The stock's short interest is also high, and it might attract some buyout bids.
Wish certainly isn't down for the count yet, but investors should be aware of five red flags before considering the stock a turnaround play.
1. Logistics and quality control issues
Wish's platform enables merchants, most of whom are located in China, to ship their products to overseas buyers in over 100 countries. These merchants often sell their products at much lower prices than regional retailers and online marketplaces, but the orders take a lot longer to arrive.
Wish's heavy dependence on Chinese merchants frequently exposes its buyers to counterfeit, low-quality, and dangerous products. It can also take a long time to process returns and refunds for those products.
Long shipping times and quality control problems have consistently been the top complaints among Wish's shoppers. To address those issues, Wish has been expanding its own proprietary logistics network and providing financial incentives to higher-quality merchants to weed out the bad players -- but those costly initiatives could also prevent it from stabilizing its losses.
2. Its ongoing loss of active shoppers
At the time of its IPO, Wish served over 100 million monthly active users (MAUs). As of last quarter, that figure had dropped to just 60 million. Its last 12-month (LTM) active buyers also plunged 32% year-over-year to 46 million.
Like many other e-commerce companies, Wish faces tough comparisons to the pandemic's temporary boost for online purchases. But those larger companies -- including Amazon (AMZN -0.59%), MercadoLibre, and Alibaba -- merely face slower growth instead of year-over-year declines like Wish.
After growing 34% in fiscal 2020, Wish's revenue fell year-over-year in the second and third quarters of 2021. It expects its revenue to decline sequentially again in the fourth quarter -- even after factoring in holiday sales -- and analysts expect its revenue to drop 17% for the full year.
3. It was just banned in France
In late November, French regulators ordered the country's app stores and search engines to remove Wish following a year-long investigation. They claimed that many of the toys, electronics, and jewelry that were sold on Wish were dangerous and didn't comply with EU regulations.
Shortly afterward, Alphabet's (GOOG -0.19%) (GOOGL -0.15%) Google and Apple removed Wish from their French app stores. Google, Microsoft's Bing, and other search engines also removed all their links to Wish.
Wish doesn't disclose how much revenue it generates in France, but it generated 47% of its core marketplace revenue from Europe in the first nine months of fiscal 2021. If other European countries follow France's lead, Wish's slowdown could be even uglier than what analysts currently expect.
4. Its founder and CEO is leaving
Last month, Wish announced that its founder and CEO, Piotr Szulczewski, would step down in February but remain on the company's board. However, Wish didn't immediately appoint a successor, and merely said it had "engaged an executive search firm to assist in recruiting a new CEO."
It wouldn't be a red flag if Szulczewski resigned while Wish was firing on all cylinders. After all, that's when Jeff Bezos left Amazon earlier this year.
But Wish isn't firing on all cylinders: It's facing a major slowdown and a regulatory crisis. Swapping out the coach in the middle of this losing game is a bright red flag that indicates darker days are ahead.
5. Its insiders are scrambling for the exits
Lastly, if Wish were poised for a turnaround, you'd expect its insiders to be aggressively buying more shares at its all-time lows. But that's not happening.
Instead, Wish's insiders actually sold more than seven times the number of shares they bought over the past three months. Over the past 12 months, they sold more than twice the number of the shares they bought.
Wish is clearly a value trap
Back in early June, I warned investors that Wish wasn't a bargain at $8.50 per share. I'm repeating that warning today at about $3 per share. Wish is still in trouble, and it can't be considered a value play until it stabilizes its MAU growth, finds a new CEO, and addresses its looming regulatory challenges.