Somewhat quietly, there’s been a correction in the market and it’s hit Wix.com (NASDAQ:WIX). On the last day of September, WIX stock traded near $120, and had more than doubled in 2018. Just seven trading sessions later, Wix.com stock has declined 18% on basically no news.
The pullback seems part of a “risk-off” trade, particularly in small- to mid-cap stocks. Similar small business-focused tech plays have struggled: both Square (NYSE:SQ) and Shopify (NYSE:SHOP) have lost roughly 15% so far in October. There, too, there’s little, if anything, in the way of news to suggest a catalyst for the declines. Rather, investors simply appear to be taking profits.
In the case of Wix.com stock, the pullback looks like an opportunity. (For both SQ and SHOP, I’m not so sure.) This remains an exceptional growth stock with a hugely attractive story. WIX stock isn’t cheap, but relative to peers (including SQ and SHOP) it looks inexpensive.
Investors might want to be careful in the near-term, given a “falling knife” chart. But from a long-term perspective, WIX back under $100 looks like a buy.
The Wix.com Story
The story behind WIX is pretty simple. The company allows customers to develop their own websites. It’s not necessarily a unique model. Competitors include GoDaddy (NYSE:GDDY), Web.com (NASDAQ:WEB), and Endurance International (NASDAQ:EIGI). But Wix’s model seems simply better.
Its tools are easier to use and far better at creating websites that appear professionally designed. Wix.com even adds AI to the mix. It’s added its own code, allowing both professionals and less-skilled users to design better sites and integrate more features.
As a result, sales have exploded. Revenue was $80 million in 2013; it’s guided to nearly $600 million in 2018, a nearly 50% annual growth rate. One key reason for the growth is that customers simply don’t leave.
The company’s Analyst and Investor Day presentation in July highlighted the long-term persistence in users. Annual retention remains steadily over 100%, as existing subscribers are more likely to add subscriptions than to leave the platform.
With a significant number of U.S. small businesses lacking a web presence, and international growth opportunities, the growth at Wix.com isn’t ending. The only question is whether WIX stock is simply too expensive.
Is WIX Stock Too Expensive?
There’s a case that even a strong story already is priced into Wix.com stock. At the moment, clearly the market is acting like that’s the case. Backing out net cash, WIX stock still trades at about 7.5x revenue, and nearly 70x 2019 EPS estimates.
In this market, those multiples aren’t necessarily out of line. But as the recent sell-off indicates, that may be the point. Given trade war concerns and huge gains in tech, investors are looking to step to the sidelines. From a ‘feel’ standpoint, that perhaps makes some sense.
But WIX isn’t as expensive as it looks. Free cash flow should be in the range of $100 million this year, suggesting a (slightly) more attractive 45-50x P/FCF multiple. The company also sees a path toward doubling free cash flow margins over time, thanks to the profitability of incremental revenue.
Assume that Wix can get close to those margins and keep growing revenue at the current 40% rate. It doesn’t take very long, at all, for WIX stock to grow into what looks like a healthy valuation.
And with SQ and SHOP, in particular, at double-digit revenue multiples and higher P/E ratios, a narrowing of that gap would mean that Wix.com stock should outperform even if the group rebounds from the current sell-off.
Wix.com Stock May Take Some Patience
Admittedly, investors may want to dip in a toe here, rather than diving in. The chart looks ugly at the moment, and if the weakness in growth and tech spreads, the entire market could have some weaker days in front of it. A key earnings season is fast approaching, and any disappointments will not be met with a favorable reaction from investors.
But even at high valuations, this looks like one of the more attractive growth stories in the market and a stock available at a discount to recent prices. That’s a nice combination worth buying, even if it means investors have to ride out some volatility.
As of this writing, Vince Martin has no positions in any securities mentioned.
