Other than a short-lived rally in June fueled by Reddit users, ContextLogic (NASDAQ:WISH) stock is on a permanent trajectory downward.
WISH stock peaked at $32.85, shortly after its initial public offering earlier this year. The company’s unfavorable valuations, mixed first-quarter results, and poor sales forecast continue to weigh on its share price.
Investors still holding WISH shares have too many reasons to justify selling shares and taking a loss.
Reddit’s r/WallStreetBets created memorable memes on WISH shares in mid-June. A favorite was “WISHing for gains” alongside the four-leaf clover representing Clover Health (NASDAQ:CLOV).
The push sent WISH shares to a $14 high for the month. Unfortunately, momentum investing ends when bullish buying volume dissipates. Weak fundamentals are major headwinds for WISH.
In May, ContextLogic posted revenue growing by 75% year-on-year to $772 million, yet the firm still lost $128 million, compared to $66 million the year before.
Free cash flow worsened to a negative $354 million on a non-GAAP measure, compared to $129 million Y/Y. The purchase of property and equipment skewed FCF results. Higher operating costs are typical for companies in the growth phase.
A Closer Look at WISH Stock
Markets cannot forgive ContextLogic for the increasing quarterly losses. The company forecasted revenue in the range of $715 million to $730 million, worse than the $758.8 million consensus estimate.
In the second quarter, analysts expect WISH to lose 13 cents a share. People are taking a leap of faith by investing in the company too soon after its IPO. With a market capitalization in the $6 billion range, WISH is overvalued. It is operating at nowhere near profitability or break-even.
Investors could buy Jumia Technologies (NYSE:JMIA) instead. The online retailer posted six consecutive quarters of positive gross profit. Jumia is a unique firm compared to WISH in that it operates primarily in Africa.
WISH does not offer its advertisers anything that differentiates itself from the competition.
For example, its ProductBoost option only lifted revenue by $50 million, up 14% from last year. WISH is relying on normalized advertising spending to increase revenue. Still, WISH said its advertising spend in emerging markets is temporary.
The spending cut was due to logistical challenges due to the pandemic. If the pandemic lockdown does not return later this year, ContextLogic will reengage its users. This would increase its monetization efforts.
Despite this article’s bearishness for WISH, speculators may bet on a turnaround.
The company expects to drive steady gross margin expansion in the quarters ahead. It has a long-term target of 70% to 75% of revenue.
This is achievable as its logistics business benefits from economies of scale and product acceleration. Sales and marketing expenses will need to rise faster than revenue growth in the short term. As customer growth accelerates, WISH may achieve a breakeven quarter sooner than markets expect.
With EBITDA as 70% of revenue by FY 2025, WISH shares could have a fair value of $14.31. The assumptions in a five-year discounted cash flow EBITDA exit model are:
|Discount Rate||12.0% – 10.0%||11.00%|
|Terminal EBITDA Multiple||2.0x – 3.0x||2.5x|
|Fair Value||$12.59 – $16.15||$14.31|
The above model uses an EBITDA Exit multiple to calculate Terminal Value after five years. Readers may set a lower EBITDA exit multiple to account for ContextLogic failing to meet revenue growth estimates for a few quarters. This negative view is consistent with the company’s weaker guidance for the next quarter.
Two groups of ContextLogic investors are sitting on big losses. Those who bought the stock after its IPO will not get their money back for at least a few years. More recently, the Reddit meme lifting WISH’s stock price ended in early July.
Unless the company posts strong second-quarter revenue next month, the stock will not go anywhere.
Momentum investors are better off selling the stock and looking for another company enjoying above-average daily trading volume. Such stocks are more likely to “pop,” rewarding short-term investors.
On the date of publication, Chris Lau did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.