Once a highflier, Wix.com (WIX 0.11%) has lost its wings. During the pandemic, the software provider saw its business boom as users scrambled to digitize their businesses. But lately, demand for its service has tapered off as global economies reopened.
Investors mostly expected Wix's growth to revert to its pre-pandemic trajectory. Yet they were surprised when Wix guided for just 8% to 10% growth in the second quarter -- even lower than pre-pandemic levels.
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A mediocre first quarter
To set the stage, recall that Wix grew revenue 30% and 29%, respectively, in 2020 and 2021. But just as investors set their expectations for these levels of growth to continue, Wix has seen its momentum stall in recent quarters -- a result shared by large swathes of other companies that surged during the pandemic.
Its first-quarter results reflect the new reality. Revenue and bookings were up 14% and 12%, respectively. A year ago, these figures were up 41% each. Its operating loss deepened to $115 million, compared to a loss of $87 million in the prior-year period. Free cash flow also reversed from a $15 million inflow to a $34 million outflow.
To make matters worse, investors should brace for even weaker quarters ahead. Management is guiding for revenue to grow 8% to 10% in the second quarter and 10% to 13% for the full year.
The days of hypergrowth are over
While external headwinds like the economy and geopolitical tensions have impacted Wix's recent performance, there is no clear evidence growth will return to prior levels, even after these headwinds subside.
Management has guided for a 20% free-cash-flow margin by 2025. On the one hand, this might signal more financial discipline in cost management and operating efficiency. But it could also mean Wix cannot find enough opportunities to reinvest its cash flow.
Having said that, Wix can continue to grow long term (albeit at a slower pace) by riding on the growing importance of e-commerce to small and medium-sized businesses. Yet investors need to be realistic with their expectations, given the tech company is much larger today -- its annual recurring revenue has surpassed $1 billion.
Valuation reflects investors' pessimism
It has been tough to be an investor in Wix lately. The broad tech sell-off and slowdown for e-commerce have contributed to a more than 80% decline in Wix stock from its all-time high. As a result, the stock is trading at a relatively low valuation. Its price-to-sales (P/S) ratio is currently 2,9, far below its five-year average of 10.1.
While the stock may be oversold due to the weak market sentiment toward high growth but unprofitable tech stocks, the software company still needs to deal with its internal problems. The lower share price reflects the new paradigm for Wix as it moves into the next stage of growth.
However, investors who have shunned the stock previously due to its high valuation may find the stock price more palatable today, especially if they are bullish on Wix's prospects.
