Over the last year, investors in Wix.com (WIX -2.19%) -- myself included -- saw the value of their shares decline by about 75%. While results like this can be a hard pill to swallow, investors should be cautious not to let stock performance alone dictate whether or not they should sell. After all, the role of any investor is to assess their available opportunities for what they are today and not what they were.
With that approach in mind, here's why I'm still holding onto my Wix stock.
Image source: Getty Images.
Wix at a glance
Before looking at where Wix's stock could go, it's best to understand what Wix truly does.
Wix is a drag-and-drop website creation platform that allows anyone to build the web presence they desire. Whether it's a photographer, blogger, restaurant owner, or any other kind of small business, Wix helps them easily set up a professional-looking website without needing to write any code.
But while setting up a website is often the first step, most businesses today need more tools, and Wix is making that a possibility. On top of being able to easily assemble their online presence, users have access to a comprehensive suite of services, including scheduling, fulfillment, online payments, and plenty more, that they can use to help run their businesses. With these services included, Wix functions not just as a design platform but as a more complete digital operating system.
As Wix has built out these additional tools, it's also been spending heavily in areas like customer care and product development to make it happen. As part of its product development strategy, Wix has acquired several companies such as SpeedETab and Rise.ai to help with mobile ordering and easy-to-integrate loyalty programs for its users. This increased investment in its business solutions segment has led to diminished profitability overall in recent quarters and has many investors wondering whether or not it'll last.
2021 results
Wix just wrapped up its 2021 fiscal year, and suffice to say the market wasn't pleased. Following its fourth-quarter report, Wix stock dropped by more than 20%. But let's dig into the numbers a bit.
Annual recurring revenue from subscriptions crossed $1 billion for the first time ever and increased 15% versus the same period a year ago. But this was a significant slowdown from the 24% growth Wix saw the year prior. According to management, this deceleration is primarily due to a pull-forward in demand from the pandemic. As many businesses were forced to shift online during COVID-19, Wix saw a rapid increase in new users throughout 2020. And now, as the company laps those strong quarters, the year-over-year comparisons are looking a bit worse.
Another lackluster result was the premium user count. Wix reported six million total premium users at the end of 2021, which was just a 9% increase from its 2020 figure. While the company is still growing, this was yet another significant decline in pace from previous years.
There were, however, two major bright spots during 2021. First, its net revenue retention rate rose from 113% in the first quarter to 116% by the fourth quarter, demonstrating existing customers' willingness to spend more. Second, Wix saw rapid growth in revenue from its partners. While the company is known primarily for its success in the self-creator or do-it-yourself space, agencies and professional website creators are turning to Wix as well. In fact, over the last two years, Wix's partner revenue tripled to $257 million.
Why I'm holding my shares
Although 2021 clearly wasn't quite the year investors were expecting, extrapolating the results from any short period can be a mistake. Instead, it's worth examining some of the longer-term trends.
Over the last five years, Wix's market share among content management systems has increased from 0.6% to 3.1% and now ranks third behind only WordPress and Shopify. Over that same time period, Wix's revenue per share has grown at roughly 25% annually.
But revenue isn't the only number to pay attention to -- eventually, that revenue has to turn into cash flow. And on the latest earnings call, management laid out the roadmap for just that. CFO Lior Shemesh expects the company's free-cash-flow margin to reach roughly 10% by 2023 and reach 20% long term.
If Wix is able to continue growing its revenue at least 10% annually while reaching that estimated cash-flow target, it should be generating more than $350 million in free cash flow by 2025. If we assume the market values Wix at a market cap to free cash flow ratio of about 20 times, that would put Wix's market cap at roughly $7 billion -- well above its current market cap of $4.3 billion.
While that might not sound like an outstanding return, I think it's quite likely Wix will surpass my growth estimates. For that reason, I'm holding onto my shares.
