Shares of Wix.com (WIX -0.42%) have fallen sharply from their 52-week high, but shareholders received some interesting news this week as Starboard Value has taken a 9% stake in the company. Shares rose 15.7% on Monday based on news of the prominent activist investor revealing its position. Here's why Starboard's involvement is a positive development for Wix shareholders and why there could be even more upside ahead.
Hold the breadsticks
Activist investors are investment firms that take large stakes in companies and then use their influence to push for changes that they believe will help to propel shares higher, such as ideas for cutting costs, changes to senior management, and increasing returns to shareholders. In the past, activists and management teams often had adversarial relationships, but nowadays, though there are still some acrimonious situations, many management teams are taking a more collaborative approach and working with activists to try to unlock value.
Starboard Value is one of the best-known activist investors in the game, and the fund had tremendous success with its investment in Darden Restaurants, the parent company of Olive Garden and LongHorn Steakhouse, several years ago. Starboard was so fastidious in its activist campaign at Darden that it famously (or perhaps infamously) pushed Olive Garden to change the cadence at which wait staff brought out free breadsticks and to add salt to the water it used for cooking pasta. Laugh if you want, but the investment was a tremendous success for Starboard as shares gained about 50% in the 18 months following its involvement.
Image source: Getty Images.
If it worked once ...
It's a more recent investment that bodes especially well for Wix shareholders. In late 2021, Starboard took a stake in a company that Wix knows well: competitor GoDaddy. At the time, Starboard said shares of GoDaddy looked undervalued. Shares of GoDaddy, which are down 14% year to date, have drastically outperformed shares of Wix this year with the latter down nearly 50% over the same time frame. GoDaddy and Wix both trade at about three times sales, but GoDaddy is profitable and has earned a hefty multiple of 35 times earnings while Wix is not yet profitable and has seen profitability decline over the last few years.
Pushing companies to boost their profit margins has historically been part of Starboard's modus operandi. The companies have similar gross margins in the ballpark of 60%, but Wix reported a negative operating margin of 21.7% in its latest quarter, while GoDaddy boasted a much healthier operating margin of 12.3%. So while the details of Starboard's plan aren't yet known, it seems likely the firm will try to work with Wix to cut costs and improve profitability.
Is Wix undervalued?
As it did when it invested in GoDaddy, Starboard says Wix is "undervalued" and represents an "attractive investment opportunity." Starboard may be right that Wix is undervalued at 3.5 times sales. The stock traded at a much higher price-to-sales multiple of between 10 and 20 as recently as last year. To be clear, the stock is in a different environment now where rising interest rates have caused valuation multiples to come down, but there is a huge gulf between where Wix currently trades and the valuation it enjoyed not long ago, meaning there could be plenty of room for upside.
Wix management has outlined a plan and goal of getting to $2.5 billion in revenue by 2025. Let's say Wix gets no multiple expansion and still trades at 3.5 times sales of $2.5 billion by 2025 -- this would get Wix to a market cap of $8.8 billion, or a share price of about $156. Compared to its current market cap of $4.6 billion and $82 share price, that would be almost a 90% gain for the stock.
The current environment hasn't been particularly accommodating to growth stocks that aren't profitable, and a lot could happen between now and 2025 that could derail management's plans. But I like the idea of following Starboard into this stock and seeing if this major activist can help Wix right the ship and achieve its goals. This is likely best characterized as a high-risk, high-reward investment, but investors who follow Starboard's lead could end up as part of a great turnaround story.
