What happened
The early pandemic surge in website building and new online activity appears to have long since dissipated. Shares of top website creation company Wix.com (WIX -0.30%) have been suffering as its once fast-paced growth trajectory settles down to a more gentle slope of expansion. The stock fell by 16.5% in May, according to data from S&P Global Market Intelligence, after its first-quarter earnings report left many investors worried.
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So what
After a torrid run of more than 30% year-over-year growth for much of 2020 and 2021, Wix reported revenue growth of just 16% in 2021's fourth quarter. Even worse, management projected that revenue would grow at just an 11% to 13% pace in Q1 2022 -- though it said it expected growth to accelerate as the year progresses.
So here's the good news: When it delivered its Q1 numbers on May 15, Wix actually bested its guidance, reporting 14% growth in revenue to $342 million. The bad news, though, was its updated guidance. Revenue for the year is now expected to be up just 10% to 13%. An acceleration in its expansion rate is, apparently, not in the cards. Granted, the company's suspension of business activity in Russia is presenting a headwind, as are unfavorable changes in foreign currency exchange rates. However, even backing out those issues, Wix said its full-year growth forecast would only be 12% to 15%.
Adding to the angst among shareholders was that Wix's Q1 free cash flow was negative $33.6 million. About $18 million of that negative result was attributable to the construction of the company's new headquarters, but it's still not the sort of result investors were looking for. Wix had previously forecast that its free cash flow margin would be about 5% for 2022, so it will have to dig itself out of a hole to meet that guidance.
Now what
Web content creation for small businesses isn't going anywhere, and Wix has a strong presence and global name recognition in its space. Customers are still spending at a healthy rate. However, Wix has matured into a more slow-and-steady business -- and one that needs to prove it can turn a profit.
The board of directors approved a plan that they believe will allow the company to achieve a free cash flow margin of 20% by 2025, but that's a long way down the road.
If Wix can pull its plan off, shares at today's levels could be a fantastic long-term value. Right now, Wix trades at just 3.5 times trailing 12-month sales. However, given its lack of profitability and the fact that its revenue growth expectations are decelerating, it's hard for me to get too excited about this stock at this particular juncture. I don't plan on selling my position at this moment, but I won't be adding to it either.
