What happened
Shares of web content-creation company Wix.com (WIX -0.30%) popped on Monday after activist investor Starboard announced a large stake in the company late Friday afternoon. As of 10:10 a.m. ET, Wix stock was up 10%.
So what
According to a filing with the Securities and Exchange Commission (SEC) on Friday, Starboard (across its various funds) has purchased nearly 5.2 million shares of Wix, or about 9% of the company. Shares were purchased gradually over August and September, and prices primarily ranged from the low $60 per-share range to the mid $70 per-share range.
In the filing, Starboard said that it bought Wix stock because shares "were undervalued and represented an attractive investment opportunity." To that point, it's true that Wix is trading at one of its lowest price-to-sales (P/S) valuations ever.
The company went public in 2013. And before this year, its all-time low P/S ratio was about 3.1 in early 2016. But earlier this year, it dipped below a P/S of 3 for the first time and currently trades at just 3.6 times its trailing sales.
There's a lot more to a stock's valuation than just the P/S ratio. However, it does illustrate how far the valuation of Wix stock has fallen. But whether it's an attractive investment opportunity is another matter entirely.
WIX PS Ratio data by YCharts.
Now what
Wix stock is down almost 80% from its all-time high, partly because its profit margins have fallen for the past couple of years. Investors fear this company is running into problems, considering the competitive nature of the space.
However, from the perspective of Wix's management, profits have only pulled back temporarily as it builds out its platform, specifically for its enterprise partners. Because of this, management sees profitability getting back on track in the next couple of years, enabling it to generate annual free cash flow (FCF) of over $500 million starting in 2025.
Starboard's vote of confidence is encouraging. However, investors should watch Wix's business as it progresses toward its 2025 goals. If revenue growth tapers off or if FCF fails to show consistent improvement, it might not ultimately be the "attractive investment opportunity" that Starboard hopes it is.
