For some companies, now could be an opportune time for share buybacks, and Wix (WIX -0.17%) is betting that it could pay off big. In this Motley Fool Live segment from "3-Minute Stock Updates," recorded on July 11, Fool.com contributors Ryan Henderson and Travis Hoium discuss the details of this news from Wix.
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Ryan Henderson: I saw an update that Wix had a $500 million repurchase program that they had asked for approved by the Israeli courts. They're domiciled in Israel, so they have to go to the [inaudible 00:16:04] for approval whenever [inaudible 00:16:07] backed off. Split contact, market cap of the company, it's their four billion floats around there [inaudible 00:16:14] this morning? $500 million is a sizable chunk, and they have about $1.3 billion in cash and short-term deposits/marketable securities. This is a pretty big chunk of their cash balance, and if they exhausted the program entirely, it would eliminate about 12-and-a-half percent of their shares outstanding, based on the current market cap. Last year, they did something similar. They announced a $200 million repurchase program. They finished that in about 2-3 months. They do these pretty quickly which, in and of itself, can have a Boolean effect on the stock price because they are such a big buyer of it.
So sometimes they'll see the stock increase in price during these situations. It's hard to tell, but it looks like that might be what's going on right now after it's been authorized. But basically it's a big bet. They are essentially saying that we really think our stock is heavily undervalued. They are at about breakeven cash flow right now. However, in the past, at one point, they got up to about 18 percent free cash flow margins. On this last quarterly report, management said they think they can get to 20 percent free cash flow margins by 2025, which is about three years out, so fiscal year 2025. If they did that, based on their current revenues, so if revenue didn't grow at all, that would be about $260 million in free cash flow annually. That would imply about 15 times price of current free cash flow. I'm [inaudible 00:18:00] you can't see it. It's like normalized free cash flow.
Basically what I'm saying is that if revenue is able to grow or even stay flat, and they're able to get to that 20 percent free cash flow margin like they say, plus adding in this $500 million buyback, the free cash flow for shareholders is probably going to grow at a really strong rate that everything looks good in management's projections, so we have to see if it will actually play out. But it was a big bet to make, and so far, the market seems to have reacted somewhat positively.
Travis Hoium: Is this going to be a good time to look back on buying shares in this market? Management teams are inevitably really bad at timing buybacks, and so this is always one of the questions I have. Is this a really opportune time? It seems like for a lot of stocks it could be. But do you think it is for a company like Wix? They obviously got an amazing balance sheet. The other option is they could acquire competitors as well and expand their business that way. What do you think about that as a strategic move?
Ryan Henderson: I think it is. I guess it's on a case-by-case basis. It depends on a businesses cash needs for Wix. They've historically been cash flow-positive, and it looks like they're returning to that. They are self-sustaining. They don't need this cash pile that they have to fuel their operations. So then, basically, what's the best thing they can do with the cash at their disposal? Acquiring competitors doesn't really make sense for Wix. I would think just because the platform is. Let's say they went out and acquired Squarespace, which is a pretty big competitor that doesn't seem really feasible. It's a very different platform, and so merging those two platforms to have one system for people to build a website on would just be really costly in its own right. So it doesn't really make sense. I don't think so, but they have been acquiring smaller players to enhance their value for businesses. They did like SpeedETab, which is for mobile ordering. For any restaurants that run on Wix, they can use SpeedETab to process mobile orders. They've been doing a lot of smaller ones like that to help boost the ecosystem and then apply it to all their customers. But I like the choice. They have been historically pretty bad at buying back their own stock, but this one is much larger than at any point they've done in the past. So this feels like a big bet, and they don't need the cash, so I think it's the right thing.