The last 12 months have been brutal for e-commerce companies such as Wix.com (WIX 3.24%). At one point, the stock was down by more than 80% from its all-time high after reaching a low point of $53.12 per share. The stock has since recovered some ground.
While there are good reasons to stay away from e-commerce companies amid headwinds like post-pandemic disruptions and geopolitical tensions, bargain hunters are excited about buying these stocks on the cheap.
Before loading up on Wix stock, however, let's first consider the bull and bear case for investing in the company.
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What the bulls are saying about Wix
Wix has been a solid growth stock for years. Since its IPO in 2013, revenue climbed from $80.5 million to $1.3 billion in 2021. That's a compound annual growth rate of 41%.
That success was the result of solid execution. Wix started by empowering anyone -- especially those with no coding and design skills -- to build a website with its prebuilt templates. Over time, the software provider added new tools and solutions to its platform.
Besides, Wix's freemium business model -- anyone can register a basic website for free and only pay for more advanced tools -- removed the barrier for users to sign on to its service. As a result, registered users exploded over the years, reaching 238 million in the third quarter of 2022.
While Wix's historical growth was impressive, the bulls expect more in the years to come, even though the tech company has reported slower growth in 2022 (more on this later). It can continue working to convert its 238 million registered users into premium subscribers -- numbered at six million as of Dec. 31, 2021 -- and increase the wallet share of existing paid users.
To this end, Wix has a track record of providing users with an ever-growing set of tools. The website-building foundation has expanded to include new tools and services such as email marketing, video production, analytics, and e-commerce solutions, among others, to help users succeed online.
With its extensive (and still growing) offerings, Wix is well positioned to convert its free users when they are ready to boost their online presence. The company also stands a good chance of improving customer retention since users can increasingly rely on the company to provide critical solutions -- including online booking, payments, fulfillment, and others -- to run their websites and online stores.
NASDAQ: WIX
Key Data Points
Why are the bears pessimistic about Wix?
Wix was already growing at a high rate, and the pandemic boosted the demand for its service even further. Revenue surged 30% and 29% in 2020 and 2021, respectively, ahead of 2019's 26% growth.
In 2022, however, the tech company faces numerous headwinds, including a weak macro environment, geopolitical tensions, and high inflation. In particular, weak demand (a reset to normalized, non-pandemic levels) and unfavorable foreign-exchange rates have impacted the business.
Revenue growth has only been slowing since early 2021, and it reached an all-time low of 8% in the third quarter. Worse, the company guided for just 5% to 6% year-over-year growth in the current quarter. While the bulls expect the slowdown to be temporary, bears think it's unlikely Wix will return to its historically high growth rates.
To this end, bears can point toward management's recent shift in focus from growth to cost reduction to improve profitability. In particular, Wix announced a plan to reduce costs by $150 million annually to improve its margins and free cash flow.
There's nothing inherently wrong with a company prioritizing its profitability, but you can take that as a signal Wix's hypergrowth days are over. As a result, the growth-hungry investors Wix once courted could steer away from the stock altogether.
Wix's stock is inexpensive
Wix had a good ride over the last few years in growing its business, and long-term prospects remain bright for the company. On the downside, however, there are signs that Wix will need to adapt to prospects that include slower growth, and the management team is shifting its emphasis to profitability and cash-flow generation.
Still, the stock looks quite attractive from a valuation perspective. As of this writing, the tech company is trading at a price-to-sales (P/S) ratio of 3.8, a massive discount to its five-year average of 9.6 times.
On balance, investors optimistic about the long-term outlook for e-commerce who are willing to tolerate Wix's more modest growth trajectory should consider buying the stock today.
