(C) Reuters. Wish: Pullback after Rough Q2 May Present Opportunity
I am bullish on ContextLogic (WISH), which owns and operates Wish, as its competitive positioning in a strong growth sector, and cheap share price, offset its current challenges.
Wish is one of the world’s largest mobile e-commerce platforms, offering affordable shopping experiences to millions of customers in over 100 countries.
The company combines technology and data science capabilities to create a highly visual, personalized, and entertaining shopping experience for customers.
Although the company fared poorly in the second quarter of Fiscal Year 2021, ContextLogic is one of the most popular mobile shopping apps, with over 90 million monthly active users.
The company has quite a strong balance sheet, and is virtually debt-free with marketable securities, cash, and cash equivalents of approximately $1.6 billion.
In addition, compared to the cash balance, the cash burn rate is not alarming, unless the company keeps showing similar poor performance in the next few quarters.
ContextLogic’s second quarter of 2021 had total revenue of $656 million, showing a 6.4% decline in revenue on a year-over-year basis.
The Logistics segment showed a strong 126% growth in revenue due to the strong adoption of the company’s end-to-end shipping solutions, and continuous improvement in merchant monetization — but it was offset by a 32% decline in Core Marketplace revenue, to $378 million.
The decline is attributed to lower order volumes, and a decrease in new buyer conversion rates. Active buyers also declined by 44%, to 17 million year-over-year.
The company’s Product Boost revenue stood at $50 million, showing an increase of 11% from the second quarter of 2020. This rise was attributed to merchants increasing their advertising spend with ContextLogic. The company had expected user retention to improve after improving its logistics, but unfortunately its user retention declined instead.
ContextLogic reported poor results in Q2. However, the company still retains some bright spots in the form of its high number of active monthly users, and strong cash position.
ContextLogic stock looks quite reasonably priced at the moment. Its enterprise value to trailing 12 month sales is a mere 0.8x, and its enterprise value to trailing 12 month unlevered free cash flow is 32.5x.
In 2022, revenues are expected to grow 4.6%, while EBITDA is expected to improve by 41.6%.
Wall Street’s Take
From Wall Street analysts, ContextLogic earns a Hold analyst consensus, based on two Buy ratings, six Hold ratings, and two Sell ratings in the past three months. Additionally, the average WISH price target of $9.81 puts the upside potential at 69.1%.
Summary and Conclusions
ContextLogic is positioned in a rapidly growing space, and sells at an attractive valuation, as the stock has sold off sharply over the past year.
That said, the business has seen its growth slow significantly, and is having difficulty retaining customers, making the investment thesis somewhat speculative at the moment.
Wall Street analysts are overall neutral on the stock, though the average price target is well above the current share price, implying significant upside potential.
Disclosure: At the time of publication, Samuel Smith did not have a position in any of the securities mentioned in this article.
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Wish: Pullback after Rough Q2 May Present Opportunity