2023 has started out hot for many technology stocks, and Wix (WIX -1.50%) is no exception. The website builder and provider of online tools for small businesses is up almost 20% year to date (YTD) after falling 80% from its 2021 highs. After its recent fourth-quarter earnings, shares popped 10% in late February. Investors seem to like what management has to say about becoming more efficient with expenses while also putting up strong revenue growth to close out the year.

Wix's stock is soaring to start 2023. Should you join the party and buy shares today? Let's investigate. 

Q4 earnings: Revenue beat expectations

Wix put in a strong fourth-quarter earnings report, despite seeing headwinds from foreign currency exchange rates. Sales grew 6% year over year to $355 million, beating analyst expectations of $352 million. 

Investors were worried about Wix after it lapped the COVID-19 pandemic period and saw outsized demand for its website and e-commerce tools. Over the last few quarters, revenue growth has decelerated as this outsized demand faded away, but it looks like the fears over this slowdown were worse than what actually materialized.

It appears as though revenue growth is set to stabilize in 2023. Management is guiding for revenue to grow between 11% and 13% this calendar year. That growth will be primarily driven by Wix's partner program business, where the platform works with website-building agencies and other companies like Vistaprint to build a funnel for its subscription solutions. Last quarter, partner revenue grew 23% year over year to $94.6 million, outpacing overall revenue growth by a wide margin.

Tracking margin expansion

As a company that has more than boosted revenue by 20X over the last 10 years, Wix has never worried much about generating a profit. But now, with the business maturing, it has started to set free cash flow margin targets for investors.

Previously, at its 2022 investor day, management guided for the consolidated free cash flow margin to hit 20% by 2025, increasing by around 5% annually by getting to 10% in 2023 and then 15% in 2024. Revenue was expected to grow by between 21% and 23% per year and to hit $2.5 billion in 2025.

WIX Revenue (TTM) Chart

WIX Revenue (TTM) data by YCharts

Now, Wix has revised these goals. It has brought down its revenue growth target, which is not good to see. But, Wix has accelerated its plan for free cash flow margin expansion due to multiple cost-cutting initiatives it implemented in 2022, which investors should applaud. These cuts mainly include inefficient marketing spend and laying off unneeded workers.

Now, management expects the business to exit 2023 at a free cash flow margin of between 12% and 13%. Wix has not been clear on whether it plans to exceed the previous 2025 margin guidance of 20%, but I think we can assume it will at least hit that number three years from now.

If you plan on buying shares, you should take note of these financial targets Wix has set for itself. If it doesn't hit them, something will have gone wrong with Wix's business model and expansion strategy.

Valuation is tricky 

Since Wix isn't generating much in cash today, in order to value the stock, we have to take its future guidance for both revenue and cash flow and perform a few quick calculations.

First, let's assume that Wix can grow its revenue by 12% annually for the next three years. In fiscal year 2022, Wix's total revenue was $1.39 billion. At its anticipated growth rates, that would equate to $1.95 billion in revenue by fiscal year 2025. Slap on a 20% free cash flow margin, and, three years after its 2022 investor day, the business will be generating $390 million in cash flow for shareholders.

Today, after its recent stock pop, Wix trades at a market cap of approximately $5.1 billion. Compared to my 2025 free cash flow estimate, that puts the stock at a forward price-to-free cash flow (P/FCF) ratio of 13, which is well below the market average. While a few years out, I think this means the stock is still cheap at current prices.

If you believe Wix can grow its revenue by 10% annually for the foreseeable future, buying shares at today's price could mean solid stock returns over the next three to five years and beyond.