Before the market opened on Feb. 16, Israeli-based website and e-commerce platform Wix (WIX -0.30%) reported its fourth-quarter and full-year 2021 earnings. Revenue for Q4 came in slightly below expectations, but investors were very disappointed with management's guidance for first-quarter 2022 and the fact that they decided not to give out full-year 2022 guidance.
Wix stock dropped over 20% on the news, with shares now down approximately 23% in the last five trading days. Even though this looks bad on its face, if we look under the surface, there is a lot to like about this company right now. Here's why I'm still bullish on Wix stock.
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Quality report, analyzing guidance
In Q4, Wix's revenue grew 16% year over year to $328 million. Management divides the business into two operating segments: Creative Subscriptions and Business Solutions. Creative Subscriptions is the core website building platform, while Business Solutions encompasses e-commerce tools, payments, and other digital products that companies use to help run their operations.
Creative Subscriptions revenue grew 15% year over year in Q4 to $247 million, still making up the majority of Wix's business. Annual recurring revenue (ARR), which tries to annualize Creative Subscriptions revenue, hit $1.01 billion in Q4. On top of being the largest part of the business, Creative Subscriptions has high gross margins, hitting 75% in Q4 of 2021. With high gross margins, this indicates the Creative Subscriptions segment can have high profit margins, even if Wix's overall business isn't showing much in profitability right now.
In fact, management said that if you exclude the heavy investments the company is making in Business Solutions, the Creative Subscriptions segment on its own would have 20%+ free cash flow margins.
Turning to Business Solutions, the segment grew revenue 19% year over year to $81.7 million in Q4. This is coming off a tough comparison in Q4 of last year when the segment grew revenue 107% year over year. However, in future quarters, investors need to expect Business Solutions to accelerate revenue growth if all these investments/expenses the company is making will get a good return over the long haul.
While Q4 results looked fine, investors were disappointed in management's guidance for Q1 2022. Wix expects revenue to be $338 million to $343 million in Q1, which would lead to a deceleration in revenue growth down to 11% to 13%. This seems concerning. However, Q1 will be compared to last year when revenue grew 41% and was still seeing a boost in demand from the pandemic. Once these tough comparisons go away, investors should look for revenue growth to reaccelerate back to 15% to 20%.
Partnerships and payments can drive growth
There are a few reasons I expect Wix to continue growing its annual revenue over the next three to five years. For one, the end-market of website development continues to grow steadily, with more and more businesses coming online every day around the world. On top of this, Wix has steadily gained market share in website building, growing from only 0.6% share in 2017 to an estimated 2.9% in 2021. With less than 5% market share worldwide, there is a lot of room for Wix to continue on its growth trajectory.
However, on a business level, there are two parts of the Wix story that can help drive and possibly reaccelerate revenue growth over the next few years: Partnerships and payment transactions. Partnership revenue is the business Wix gets when it offers its website building platform in conjunction with another company or with huge web development agencies.
For example, it just signed Vistaprint as a huge client in the summer of 2021, where Wix will now power its customers' websites. The on-demand printing company has an estimated 17 million users, which is a huge market for Wix to go after (for reference, Wix's entire subscriber base is only 6 million right now). Wix management thinks the Vistaprint partnership will bring in hundreds of thousands of subscribers to Wix over the next few years.
In Q4, partnership revenue hit $73.3 million, growing 53% year over year. If the Vistaprint deal does what management thinks it can, and if Wix can sign even more partners over the next few years, this segment should continue to grow at a high rate as well.
Transaction revenue is revenue from the relatively new Wix Payments product. The solution helps power Wix's e-commerce shopping cart as well as other in-person products that businesses use Wix for. The segment processed $9.6 billion in gross payment volume (GPV) in 2021, and Wix takes a cut of every dollar in revenue.
In Q4, transaction revenue grew 35% year over year to $36 million, which is highly impressive considering that the segment grew revenue a whopping 360% in Q4 of 2020. Over the next few years, investors should expect transaction revenue to continue expanding and become an increasingly large part of Wix's business.
Valuation is dirt cheap
As of this writing, Wix has a market cap of $5.3 billion. The company has around $1.5 billion in cash and marketable securities, plus $834 million in long-term convertible notes. With $1.27 billion in full-year revenue, the stock trades at a trailing price-to-sales ratio (P/S) of 4.2.
While still more expensive than the market average of 2.93, a P/S of 4.2 is cheap given Wix's potential for future growth and the high gross margins in the Creative Subscriptions segment (Business Solutions has low gross margins of 19% right now that should expand as the segment scales). If you believe Wix can grow its top line at a 10%+ rate over the next five years while maintaining or expanding its gross margins, now could be a great time to take a position in the stock.
