Shares of ContextLogic (WISH 2.22%), the parent company of the discount e-commerce platform Wish, soared nearly 40% on Feb. 13 after Citron Research posted a series of bullish tweets regarding the stock. Citron claimed that after seeing the robust growth of Pinduoduo's (PDD 3.13%) cross-border platform Temu in the U.S. market, it believed it was becoming "hard to bet" against Wish's similar business model.
Yet I don't think those claims make any sense. Temu is actually an overseas extension of Pinduoduo's core e-commerce platform in China, while Wish is a stand-alone platform that relies heavily on third-party sellers in China. Pinduoduo is firmly profitable, so it can afford to subsidize Temu's loss-leading strategies in the U.S., while Wish is deeply unprofitable. Temu could also be pulling shoppers away from Wish as it expands across the U.S. market.
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Citron's comments briefly boosted Wish's stock, which has seen double-digit percentage swings in its share price for three straight days. But Wish is still down nearly 60% over the past 12 months. Should investors bet on a more sustainable turnaround by the end of 2023?
What happened to Wish?
Wish went public at $24 in Dec. 2020, but it now trades below $1. At the time of its IPO, Wish served more than 100 million monthly active users (MAUs). That figure had dropped to 24 million by the end of the third quarter of 2022. Its revenue rose 34% in 2020 but fell 18% in 2021 and plunged 75% year over year in the first nine months of 2022.
It also remained deeply unprofitable, but its net losses narrowed in 2021 and again in the first nine months of 2022. For the full year, analysts expect Wish's revenue to decline 72% to $593 million as its net loss widens slightly from $361 million to $395 million. Its growth fell off a cliff for three simple reasons.
First, Wish's heavy dependence on third-party sellers in China for cheap goods resulted in quality control and shipping issues. Customers who encountered those problems were less likely to return -- especially when Pinduoduo's Temu, Alibaba's AliExpress, and Amazon's third-party marketplace all offered similar products from Chinese merchants at comparable prices. That pressure compressed Wish's gross margins, which dropped from 63% in 2020 to 31% in the first nine months of 2022.
Second, Wish's growth cooled off in a post-pandemic market as people bought fewer products online. Lastly, it reined in its marketing expenses to stabilize its losses, but that strategy reduced the visibility of its fledgling brand.
To make matters worse, Wish kept swapping leaders as its growth stalled out. Its founder and CEO Piotr Szulczewski stepped down last February, and his successor Vijay Talwar lasted just seven months before leaving last September. Joe Yan, an operating partner at Wish's leading investor GGV Capital, is currently the company's interim CEO.
Why would anyone be bullish on Wish?
Citron Research, which was a prolific short-seller before pivoting toward long-only recommendations in early 2021, claimed that Temu's two recent Super Bowl ads indicated that Wish's comparable business model wasn't obsolete yet. Citron also pointed out that Temu was the most downloaded iOS app in the U.S. in recent months.
However, those facts seem to support a bullish thesis for Pinduoduo, which is already the third-largest e-commerce company in China, instead of a contrarian one for Wish. They also ignore the fact that Alibaba, Amazon, and other cross-border marketplaces operate similar business models as Temu and Wish.
Citron also notes that Wish has "multiple years of liquidity available" since it was still sitting on $837 million in cash, equivalents, and marketable securities. The company had no long-term debt and an untapped credit line of $280 million at the end of the third quarter. However, Wish is still expected to lose about $300 million to $400 million annually through at least 2024. Its recent decision to lay off about 17% of its remaining workforce might stem that bleeding, but it still hasn't presented any compelling ways to gain new shoppers or grow its revenue again.
Wish stock certainly looks cheap trading at less than 1 time this year's sales plus a negative enterprise value of $329 million. Only 7% of its shares were being shorted at the end of January, which implies that even the short-sellers don't expect it to drop much further. However, it could continue to trade at that discount until more potential catalysts appear.
Where will Wish stock be in a year?
I don't think bankruptcy is on the near-term horizon for the company. Instead, the stock is likely to remain stagnant at around $1 per share unless it consistently grows its MAUs and revenue again (at least on a sequential basis). For now, investors would be better off buying shares of Pinduoduo, Amazon, or even Alibaba instead of betting on Wish's unlikely turnaround.
