I’ve written about Wish.com parent ContextLogic (NASDAQ:WISH) in the past. I liked the company’s business model as it fulfills a very specific niche. However, I also pointed out that WISH stock would be a volatile and speculative purchase.
This is apparent in how WISH stock has performed since my article in mid July. The stock lost close to 50% of its value in that timeframe as it fell from approximately $12 to $6.69. Speculative stocks such as WISH will truly test a long-term investor’s patience and stomach.
This is especially true in the current market environment which is less optimistic about the future. I wouldn’t say that we are in a bear market just yet. However, the penalty investors dish out to high-flying growth stocks for missing earnings estimates is quite harsh. I believe the selling is overdone WISH stock.
Terrible Quarter Hit WISH Stock Hard
Investors were disappointed with ContextLogic’s recently announced its second-quarter results. WISH stock fell by more than 18% after the earnings announcement and has trended down since. Quarterly revenues were $656 million in Q2 2021 a 6% decline from the $701 million reported at the same time last year.
The drop primarily came from the company’s Marketplace revenue which fell by 29% during the quarter. Marketplace revenue was $428 million for the quarter compared to $600 million at the same time last year. This drop was partially offset by Logistics revenue which grew by 126%.
It is understandable that the drop in Marketplace revenue would be concerning for investors. This could indicate some underlying problems for Wish.com as an e-commerce website. During the quarter, the company saw a 13% drop in worldwide installations of its app as well as a 15% reduction in average time spent. Total monthly active users and the last 12-months’ active buyers were 90 million and 52 million, respectively. This represented a 22% and 26% decline.
The company was quick to blame the easing of the Covid-19 pandemic restrictions for the decline in users and engagement. However, I have a hard time buying this excuse. If it were true, we would be seeing declines in e-commerce engagement across the board. This hasn’t happened, leading me to believe that the issues are with Wish.
Wall Street Is Too Bearish on the Future of WISH stock
The poor quarterly results have resulted in a wave of downgrades for ContextLogic. The most damning of which is from J.P. Morgan which slashed its price target to $5 from $17. The new price target represents a 25% drop from the current share price of $6.69.
The Wall Street firm has an “underweight” rating on WISH stock compared to its previous “overweight”. According to analyst Doug Anmuth, “the company suffered Marketplace revenue decline as the economic reopening softened demand, but the pressured user retention also pointed at company-specific issues.”
I generally agree with this assessment but disagree with the magnitude of the issue. J.P. Morgan believes that Wish.com has suffered significant damage to its business model and could take many quarters to undo. I don’t believe that this is the case as ContextLogic has been continuously making improvements to its logistics and products.
The consensus price target of 11 Wall Street analysts is $10.33 with a range of $19 to $5. This indicates that there is a wide range of revenue estimates for WISH stock. I believe that one bad quarter does not make a trend. Therefore there is a chance that ContextLogic’s earnings results could still surprise on the upside. Note that for the first six months of 2021, ContextLogic still posted a revenue growth rate of 25% from $1.14 billion to $1.43 billion.
Looking at WISH stock from a technical analysis perspective, there could be a few more weeks to go in WISH stock’s consolidation/price decline.
It’s clear that the combination of a poor market environment and bad earnings has sapped all the enthusiasm for the stock. However, I still believe in Wish.com’s long-term viability as an e-commerce website. Investors should keep an eye out for WISH stock.
On the date of publication, Joseph Nograles 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.