My small stake in Wix.com (WIX 2.17%) was one of my worst investments in the last couple of years. The company was an early winner from the pandemic when the world briefly went all-digital, but the stock then came crashing down far below pre-pandemic levels. It wasn't just the bear market of 2022. As growth rates slowed to a crawl, Wix was found to be sorely lacking in profitability.
Wix is still a dominant force in the website creation and management space, though, and is executing a plan to get itself more financially fit. Shares have rallied nearly 80% from lows last summer. Is it too late to buy?
Wix reports record profit, in at least one key area
Back in the day, Wix was a high-growth business, and it was highly profitable (at least as measured by free cash flow). Then the early pandemic boom time and all of its digital excesses struck. Revenue surged 30% higher in 2020, followed by 29% in 2021.
Feeling good vibes about its low-code website development platform, Wix started spending freely during this period. But then the especially good times came to an end. 2022 revenue only managed to increase 9% (or 11% when excluding currency exchange rates). The pace of spending remained, though.
The end result was a slow-growth and highly unprofitable business (as measured by GAAP net income and free cash flow) by the end of 2022.
Data by YCharts.
But as is the case with software-based business models, there was plenty of potential for Wix if it could quickly right-size its operation given the path going forward. Even activist investor Starboard Value saw, well... value, and began building a large stake in Wix stock late in 2022.
Management took heed and began cutting costs. Indeed, efforts yielded pretty fast results. Wix actually reported a record quarterly free cash flow of $52 million in fourth-quarter 2022, although it was still unprofitable for the full-year period. An accelerated share repurchase plan of $243 million was also completed in Q4, which more than offset the $237 million worth of employee stock-based compensation doled out during full-year 2022.
Is Wix stock too expensive now?
Management offered an encouraging outlook for 2023. Revenue is expected to grow 9% to 11% to about $1.52 billion. Free cash flow is expected to be $102 million to $107 million (or $152 million to $162 million when excluding the $50 million to $55 million in expenditures to complete the Wix headquarters project).
As of this writing, Wix stock trades for about 47 times 2023 expected free cash flow, and is on a path toward even more robust free cash flow (and GAAP net income generation) within the next couple of years. That will especially be the case once the headquarters expansion is finally completed by the end of this year (spending on HQ construction was a whopping $65.9 million in 2022).
Wix isn't a cheap stock right now, but things look promising for 2024 and beyond. It all hinges on the company's ability to continue cutting costs, all the while managing a high-single-digit or low-teens percentage revenue growth rate. I'm not a buyer of the stock here -- I have a big enough position for my liking at the moment. But I'm plenty happy to hold as the company continues to gradually grow its web creation platform and get itself profitable once more. If you decide to buy, I'd recommend caution, perhaps using a dollar-cost average or similar plan to make purchases at this juncture.
