On Monday, May 16, website building platform Wix.com (WIX -0.64%) reported its earnings results for the first three months of 2022. The company posted solid first-quarter revenue growth of 14%, but its guidance was below Wall Street's estimates, causing investors to sell shares the day the report was released.

Investors are getting increasingly bearish on software and internet platforms like Wix, so it is not surprising to see the reaction to these results. 

Even though guidance has been brought down, Wix stock looks like an incredible bargain for investors right now with shares down 57% this year. Here's why.

A person sitting with a baby while also on the computer.

Image source: Getty Images.

First-quarter results looked fine, but there was nothing spectacular

Wix's core business is selling premium subscriptions for people to build and manage their websites. It has over 6 million paying subscribers around the world who pay a monthly, annual, or multiyear fee to access its website building tools. The company uses annualized recurring revenue (ARR) as a key metric that evaluates monthly revenue multiplied by 12.

In the first quarter, these subscribers translated into Creative Subscriptions revenue of $255 million, up 13% year over year, and Creative Subscriptions ARR of $1.04 billion. ARR was up 12% in the first quarter and has grown at a 20% compound annual rate over the last two years.

Moving to Wix's second segment, Business Solutions, revenue grew 17% year over year in the first quarter to $86.6 million. This segment encompasses Wix's payments business and various other products that are not its core website subscriptions. It has low gross margins of 19% compared to Creative Subscriptions' 75% margins, so it is not nearly as important to Wix's business, but it can still be a solid growth driver over the next decade. 

Profitability for the company looked bad in the first quarter, with a net loss of $227 million based on generally accepted accounting principles (GAAP), but that comes from its unrealized losses from its stake in Monday.com (an operating system for teams to manage workflow). What investors should focus on is free cash flow, which was negative $33.6 million in the first quarter. This doesn't look good, either, but management said on the conference call that the company will be cash-flow positive for the whole of 2022. 

Overall, there was nothing to be amazed by in the first quarter, but it was another solid result for Wix. However, investors and analysts got a bit nervous when the company lowered its full-year revenue guidance range from 11% to 13% growth down to 10% to 13%. This might seem like a small change, but with market participants on edge right now, it isn't surprising to see investors turn negative after getting this update.

New growth drivers bearing fruit

Wix started out with a do-it-yourself (DIY) website building tool, and that is still its bread and butter. But increasingly, revenue growth will be driven by two fast-growing products: transactions and partner revenue.

Transaction revenue comes when someone uses Wix Payments, the company's online and in-person checkout tool. Wix earns a slice of each dollar spent through its internal system, which hit $2.6 billion in gross payment volume (GPV) in the first quarter of this year. This led to transaction revenue of $37 million in the quarter, up 24% year over year and up substantially from $5.9 million two years ago. It is still early days, but transaction revenue is showing great signs of growth right now, even with the first quarter of 2022 lapping the large stimulus checks (from early 2021) in the United States.

Partner revenue is when Wix gets subscriptions from third-party web design agencies and its business partners like Vistaprint and Legal Zoom. In the first quarter, this segment (which is a sub-segment of Creative Subscriptions) brought in $82 million in revenue, up 41% year over year. Like transaction revenue, the partner strategy is still in its early days but is already a significant portion of the $1 billion-plus in subscription revenue Wix earns each year. If it continues to grow at a high double-digit rate, it can drive Wix's overall growth over the next three to five years.

Valuation is dirt cheap with a long runway to grow

With the stock down so much this year, Wix now trades at a market cap of $3.9 billion. Over the last 12 months, the company has generated $1.27 billion in revenue, giving it a trailing price-to-sales (P/S) ratio of 3.1. Wix hasn't generated consistent profits, so it is hard to value it on an earnings multiple. The big question investors need to ask is: What will profit margins be when this business matures?

Management gave some insights into this in its first-quarter earnings release. In 2025, the company expects to have free-cash-flow margins of 20%, compared to around break-even right now. This will come from operating leverage from its new investments like partners and payments and slowing down its pace of hiring. If it had 20% free-cash-flow margins today, the stock would trade at a price-to-free-cash-flow of 15.5, or below the market average. This is cheap and indicates investors don't think Wix will grow much over the next few years.

But Wix's revenue base should be much higher in 2025. There are still millions of small businesses and sole proprietors that need an online presence, providing a steady tailwind for Wix to grow. It also doesn't hurt that the company has consistently gained market share versus competitors in the last few years. This combination of a low P/S ratio, a clear path to growing free cash flow, and a steady tailwind to grow the bottom line makes Wix stock an incredible bargain at the current price of $68 a share.