After an initially volatile and choppy start, Wix.Com Ltd. (NASDAQ:WIX) has decisively turned the corner. Year-to-date, Wix.com stock gained a massive 49% in the markets. This performance follows a 27% return last year, and a cool 100% profit in 2016. But with any fast-moving equity, the question is: How long can this momentum keep going?
At first glance, things seem to be rising at an appropriate clip.
Along with the robust investor sentiment, Wix.com aggressively ramped-up its advertising presence. Unlike rivals such as Godaddy Inc (NYSE:GDDY), WIX isn’t known for endorsing just one celebrity. Instead, the website builder has an extensive celebrity-endorsement list that continues to grow.
Furthermore, the company’s website generator is, in my opinion, light years ahead of the competition. Wix.com features what I would term a truly authentic graphical user interface platform. Want to put an element or a text block at a very specific place on your website? This platform allows you to do exactly that.
Other website builders that I’ve experienced “fight” you during the creative process. For instance, elements can be put in a general area, not necessarily the specific point where you want. Furthermore, Wix.com offers an array of graphically-enticing templates that you can use and modulate right away. To me, that’s a big plus for Wix.com stock.
What’s not a big plus is just how much this company has soared. During the trailing three years, Wix.com stock has jumped nearly 312%. While I don’t begrudge corporate success, website-building isn’t necessarily a unique concept. With internet specialization being the name of the game, companies like Shopify Inc (NYSE:SHOP), Amazon.com, Inc. (NASDAQ:AMZN), and Facebook, Inc. (NASDAQ:FB) could steal market share.
Does Wix.com stock have the goods to continue delivering?
Wix.com Stock Financials Are Underwhelming
One of the biggest concerns about Wix.com is that it lost $50 million in 2017. Moreover, as InvestorPlace’s Lawrence Meyers states, the company has “never made a profit but has a $3.2 billion valuation.”
That’s usually a sign that something doesn’t add up. However, in this case, Meyers believes that the company can “grow into its valuation.” In the fickle and highly competitive website-building business, Wix.com levers a huge advantage — loyal customers. Meyers writes:
“Of the 18,513 premium users that joined in the first quarter of 2010, 17,712 are still there. That’s incredible retention — 68% of gross new subscriptions are for one year or longer. And 82% of total subscriptions are as well.”
I can’t argue with that. It’s extremely difficult to have that much customer retention, which also explains the meteoric lift of Wix.com stock. But looking deeper into the financials, we see metrics that aren’t particularly flattering.
Sure, top-line sales over the past four years have gone up 200%. Gross profit increased 208% in the same timeframe, due to steadily improving gross margins. However, SGA and research and development expenses have likewise shot up.
The end result? Net income losses average $49.55 per year. That tells me that no matter what management is doing, the company continues to lose the same amount of money. I must say this dynamic is odd given how much the company aggressively invested in its own growth strategy.
Moreover, because website-building isn’t unique, you have to expect sales saturation will come sooner rather than later. We should then use Godaddy as a cautionary tale. Since 2014, sales growth averaged 17.2%, much less than the 44.2% Wix.com stock averages. And taking aside the non-recurring income benefit, Godaddy barely made money in 2017.
Big Questions for Potential Wix.com Stock Investors
I’m not trying to discount the positives for buying WIX stock. I personally dig its creative platform, which I think is second to none. My sentiment also reaffirms Meyers’ argument, which is that customers are extremely loyal to the company.
And, as InvestorPlace feature writer James Brumley notes, Wix.com anticipates 40% revenue growth. That should finally make the organization a legitimate moneymaker.
Unfortunately, I just go back to the cut-throat nature of this business, which has low barriers to entry. In addition, customers have too many options. Facebook has the social media angle covered. Shopify is trying to do the same for small-business merchants. Then you have low-cost web-building competitors, such as Weebly.
Don’t get me wrong — WIX can make money. The problem is, I think the low-hanging fruit has been picked. From here on out, the growth will be heavily contested, which makes me doubt Wix.com stock.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.