Talking Stocks: Wix.com Ltd.
Updated: Feb 8, 2020
While the conventional path towards investing involves companies with strong balance sheets and consistent profitability, every now and then a new business comes up who’s potential for growth outweighs the marginal weakness in their assets.
After a recent yet significant dip in their stock price, Wix.com shares seem like an attractive purchase for the enterprising investor, especially while they float at a 22% discount to their 52-week high. If you’re looking to bet on a company that’s in a growing industry, sustains loyal customers and improves its financial health each year, then this tech company might just be your answer. Here are three critical reasons as to why Wix.com could be a BUY:
1. Rapid Increase in Online Business Market.
Based on research outlined below, recent statistics and even the incessant advertisements between YouTube videos, it’s clear that advocacy towards building your own online business has substantially grown over the last two years.
Depicted in the diagram below, there’s stellar growth in the transformation to e-commerce and it can be implied to be a result of 2 main aspects: a general shift towards digitalism, and – as mentioned above – the fact that over 60% of individuals are now inclined to begin their own online businesses.
Figure 1: Sales of E-Commerce industry 2014-2020
The figure above demonstrates the consistent growth in year-over-year sales within the e-commerce industry, and is even more significant because the rate of growth has also been shown to augment the final 3 figures (2018-2020) of the graph. The growing industry opens a path towards obtaining more potential customers, higher revenues and eventually, further profitability. The only question and potential concern here is, how much further can this industry grow?
Considering the aforementioned point, perhaps the long term outlook for Wix.com (5 years+) is slightly in the gray, but the online industry still has substantial room to grow and compensate more businesses within the next half decade. If this occurs, an elevated online presence means that more companies will be needing website developments, online purchase options, lead generations and marketing features: all with a convenient service as well as an affordable price.
This is where Wix.com are in a favorable position to undercut experienced competitors and attract a large portion of the revenue in the online business market. Although they provide an extremely user friendly service in terms of setting up a website, the fact that they even provide automated tools to market, manage, and optimize the traction of the site as a whole is extremely desirable for less tech-savvy individuals. This type of catering and dedicated investment into better customer solutions sets Wix apart from competitors and gives them a competitive advantage that could prove profitable for shareholders in the near future.
Pro Tip: The current macroeconomic market sentiments are quite bearish, which implies that all equities might suffer a little bit in the foreseeable few weeks. In this case, investors should expect some minor downturns – and if this isn’t feasible – potential Wix.com buyers should delay their purchase slightly in order to avoid the moderate plummeting of the market at the moment.
2. Retained Customers
This is perhaps one of the most appreciable aspects of Wix.com’s business, as repeat purchases are a key driver of their revenue and earnings growth. In fact, users are so satisfied with Wix.com services that 40% of 2018’s earnings was attributed to returning customers.
This level of customer retention could greatly be due to the unique service of web development for less tech-savvy individuals. According to Forbes, consumers tend to hold convenience in substantially high contempt – also known as the Amazon effect – which is why a user-friendly developer such as Wix.com truly provide the most valuable service for the everyday consumer.
Figure 2: Factors affecting consumer satisfaction:
As depicted above, over half the consumers in the Forbes survey concluded that convenience is their most important factor when it comes to satisfaction and probability of returning. Through Wix.com’s personalized services, automated plans and overall suitability to the average user, customers are undoubtedly beginning to view Wix as their most reliable lifeline when it comes to website building, aesthetics and online marketing.
Although, in a quantitative perspective, a key issue here is the cost of upholding this level of user satisfaction.
Given that the cost of acquiring a new customer is over five times the price of retaining existing ones, it’s a positive aspect that Wix.com are placing a substantial part of their effort into retaining current consumers rather than spending millions of dollars in debt to acquire new ones. However, keeping in mind that their recent investment into improved customer solutions was for over $15 million, the question arises: how much longer is dedication to improved customer solutions going to remain an advantage for Wix.com?
Most investors are becoming concerned with this level of investment into solutions as the cash flow of the company is taking a severe figurative beating because of it. Hence, Wix.com should perhaps be re-allocating their funds to finding new customers, but more specifically, new high-paying customers, in order to impel positive free cash flow.
However, in the medium term, the growth of the online business industry will perhaps facilitate the positive cash influx needed, in which case Wix.com can still continue to invest in enhancing the solutions that have attracted so much business growth thus far. This will allow the company to further retain their customers and work towards market dominance: both of which implies favorable improvement in their stock price.
3. Year on Year Growth
Against the statistics of the industry, Wix.com are able to greatly outperform it in terms of sales growth and their reputation for beating quarterly forecasts.
Figure 2: Excerpt from Wix.com Financial Analysis
As depicted above, Wix sales growth is substantially greater than the market’s performance in both the trailing twelve months (TTM) and as a 5-year average. This reflects the demand from the growing industry of online businesses and online marketing, and based on current forecasts, this industry is still set to augment for the next 2-3 years.
While Wix.com sales are likely to further grow with the industry, a second positive aspect (especially for the short-to-medium term stock price) of Wix.com’s performance is their ability to beat estimates on almost every occasion.
Figure 3: Wix.com Earnings Performance vs Estimates
With the exception of March 2019, Wix.com have been able to beat analyst estimates every quarter – both in terms of Revenue and Earnings Per Share (EPS). Because of this, they are beginning to sustain a reputation for reliability: something that’s a key indicator for many investors.
In fact, the reliability has become so consistent that it causes a rise (of up to 8%) in their stock price in the subsequent weeks after each estimate beating. This is a significant point to consider for more aggressive investors who want to hold stocks for a short period of time, as individuals can open positions beforehand and close them immediately after earnings are released in order to benefit from short-term bursts in price. A risky strategy, yet favorable for traders with an appetite for volatility.
Despite the positives, a prominent indicator which may offset this price growth is the question of profitability: when is Wix.com going to start making some real money for their shareholders? The company CEO – Avishai Abrahami – believes that the strong industry growth will facilitate low profitability levels within a year, and this seemed to appease investors on their Q2 2019 transcript call.
It can be implied that shareholders were satisfied because, although profitability will be meager, Abrahami stated that cash flow is expected to grow substantially over the next few quarters. Hence, stakeholders can expect low profitability, but high business growth and significant cash improvement: the merits of which are strong factors of stock price augmentation.
Considering the slightly offsetting fundamentals of Wix.com, it would generally be unprecedented for it to be part of an investor's core portfolio. However, for aggressive investors who are looking for prominent growth instead of steady stability, this could be a handsomely rewarding stock when held in the medium term.
Because it’s trading at a 22% discount to its yearly high, it seems an attractive incentive to buy Wix.com shares at the moment, as industry growth rates, sales prominence as well as substantial customer retention levels are favorably held by this company.
Despite the multiple positive aspects, investors should be wary of some volatility when it comes to Wix.com because the lack of profitability and the current macroeconomic conditions suggest that it’s unlikely that we’ll be seeing a bullish several weeks in the near future.
Nevertheless, considering the overall outlook several months from now, it can be implied that for the aggressive and growth-minded money-maker, the potential reward from owning Wix.com is certainly something to keep a keen eye out for.