With the growth of online retail, I can understand the attraction retail investors have to ContextLogic (NASDAQ:WISH). However, WISH stock is down about 90% from its 52-week high. And the chart hasn’t given bulls much to be encouraged about since early summer. 

That was when I first wrote about WISH stock. And I’ll admit to being intrigued by a company that looked like it might be an under-the-radar growth stock.

One reason for my optimism was that ContextLogic is going after the discount buyer. Brick-and-mortar discount chains like Dollar General (NYSE:DG) and Dollar Tree (NASDAQ:DLTR) have done well as consumers look for value in an inflationary economy. So it stood to reason that a company that was embracing value in a digital-first model might have appeal.  

But I didn’t foresee the effect the supply chain disruption would have on its business. And with the problem of lower monthly active users and declining revenues, investing in WISH stock seems like it’s based on hope. And hope is not a strategy.  

However, ContextLogic is in the process of finding a new CEO; an announcement is due before Feb. 1, 2022. That could give investors a vision into the company’s plans. And it may also keep some of the current WISH shareholders holding their shares.  

If you’re one of those investors, here are some issues I would consider when the company reports earnings in March.  

Can They Generate Positive Free Cash Flow? 

One bullish argument for WISH stock is that the company has over $1 billion of cash on hand. But when you account for liabilities, that number drops to $779 million. That wouldn’t be bad. However, Mark Hake recently gave an account of the state of the company’s free cash flow (FCF).  

As Hake points out, the company’s FCF was negative in the third quarter to the tune of $344 million. This was over 93% of the company’s $368 million in quarterly revenue (which was down from $656 million in the prior quarter). At that rate, Context Logic would have annualized cash burn rate of $1.376 billion. That leads to nowhere good.  

However, on the company’s most recent earnings call, management said there are no plans for a share buyback. And, in fact, the company said it plans to be FCF neutral before investing in growth later this year.  

What Cost Will Growth Have? 

ContextLogic explained the 39% year-over-year (YOY) revenue drop as primarily a function of pulling back on its digital ad spend. The company’s sales and marketing spend was 40% of revenue down from 64% in the same quarter the prior year.  

The decline in digital ad spend also affected the company’s total monthly active users which were down by 40% on a YOY basis. In turn, this affected the company’s revenue for each of its verticals.  

This might be easier to accept except for the fact that on the earnings call, management was quick to tell investors that they should expect revenue to decline in the next quarter which will include the holiday season.  

This leaves ContextLogic in an unenviable position in which it’s unclear that it can simply spend money to make money. In fact, right now, the opposite appears to be true.  

Can ContextLogic Retain What Made it Unique? 

I can appreciate ContextLogic making a move to ensure a better customer experience. However, in doing so it seems to be moving away from its roots as a company that was offering a “treasure hunt” experience to becoming a more traditional online retailer.  

That may be the only move the company can make but it may turn out to be a case of being penny wise and pound foolish. At the present time, the company sources most of their merchandise from countries like China. As I wrote in October, this has left them particularly vulnerable to supply chain disruptions.  

And the fundamental problem that the company faces is that expanding its logistics business will put even more pressure on the company’s margins and cash flow.  

Bottom Line

I know better than to discount the commitment of the retail investors who are holding WISH stock. However, even if you’re inclined to give this a “it can’t get any worse” roll of the dice, I’d encourage you to wait until the company starts delivering on the vision it’s laying out.  

On the date of publication, Chris Markoch 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.  

Chris Markoch is a freelance financial copywriter who has been covering the market for eight years. He has been writing for InvestorPlace since 2019.