It has been a terrible time to be an investor in Wix.com (WIX -0.30%). Over the last twelve months, shares have fallen over 70%, and Wix is not alone as investors have sold out of almost every high-growth tech stock.
The market is bearish overall, but for those willing to take a contrarian view, it may be a good time to reevaluate this company. I did just that recently and found two crucial things investors should know.
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Wix has sticky and recurring revenue
Wix is a solutions provider that enables anyone -- even those without coding or design skills -- to build a website. It also provides additional business tools, such as e-commerce solutions, payments, logo designs, and more to help customers run their online businesses. It operates a freemium model, meaning customers can either use basic tools for free or pay a fee to access more services.
Those services are critical to the company's success. As users build their website on the Wix.com platform -- and potentially move their entire online business there -- their cost to switch to competing platforms becomes very high. Clients need to duplicate their efforts in creating new workflows and training staff, among other headaches, if they want to switch.
This explains why Wix has a track record of sustainably growing how much its customers spend over time. To start, the company reported net revenue retention (NRR) of 116% in 2021. Its subscription-based annual recurring revenue hit $1 billion in the fourth quarter as well, up 43% from the same period in 2019. The tech company also estimated that existing customers would spend $15.7 billion over the next decade on its services.
All of the above suggest one thing: Wix has a high-quality revenue base that is growing and predictable over time. If the company can continue to innovate and add new features to its platform, customers are likely to stick around.
Its valuation is cheap
Any stock analysis is incomplete until we consider the company's valuation. While I find Wix's recurring revenue attractive, it would be imprudent for an investor to overpay for that attribute, something that arguably happened not long ago when the whole market was bullish on the company.
Amid the pandemic, small businesses scrambled to move online as global economies went into lockdown mode. As a result, Wix reported some of its strongest results in recent years when revenue grew 67% between 2019 and 2021. Investors were delighted, sending the stock to the sky.
But lately, investor sentiment has swung in the opposite direction, thanks to management's weak guidance for the first quarter of 2022 and the widespread sell-off of high-growth tech stocks. Shares of Wix have returned to pre-pandemic levels.
As Wix declines, its valuation has become more attractive. The stock is trading at a price-to-sales ratio (P/S) of four times as of writing, way down from its 2021 peak of nearly 20. And comparing its P/S ratio to competitor Shopify, which trades at more than 17 times sales -- Wix's price becomes even more appealing.
While the bears have focused on management's disappointing outlook, investors should step back for a more balanced view of the stock. For one, Wix pointed out that revenue growth will likely accelerate in the second half of this year. Besides, the 11% to 13% growth expected in the current quarter comes on the heels of the prior-year period's 41% increase, making for "the most difficult [year-over-year] comparable we face in 2022," according to the company.
As a result, investors who are willing to consider the company's long-term trajectory may find the stock to be a bargain at these prices.
