There are two distinct types of investors with ContextLogic (NASDAQ:WISH) stock.
The happy group bought WISH stock at the $7.52 – $8 low in May, enjoying a return of over 50%. Those who bought before May and after the initial public offering are unhappy. WISH is down by over 60% on very thin volume.
Why did daily trading volume surge in June and what will happen next?
WISH Stock Depends on Reddit
Catchy memes wishing for gains dominate the Reddit subgroup’s r/WallStreetBets. Posts about WISHing for a good trading day with Clover Health (NASDAQ:CLOV), with its four-leaf clover emoji lifted both stocks. Like all euphoria, the party ended. Momentum unexpectedly dried up in recent weeks.
CLOV toped $28.85 and is down 60% from the 52-week high. WISH shares are down 64%. ContextLogic’s fundamentals will now matter. Investors will re-visit the company’s weak quarterly results, posted on May 12.
WISH posted growing losses in the second quarter. It lost 21 cents a share, three cents worse than analysts expected. Despite impressive year-over-year revenue growth of 76% to $772 million, the bigger loss is a red flag. The business model is broken: the more money it makes, the more it may lose.
WISH burned through $354 million in cash for operations. This is due primarily to shorter merchant and vendor payment terms. Before that, the company benefited from a temporary extension of payment terms with key digital advertising partners due to the pandemic. Also, sales are seasonally weaker in the first quarter compared to in Q4.
Wish founder and Chief Executive Officer Piotr Szulczewski said, “Our primary focus is to drive continued long-term growth through efficient user acquisition, increased monetization, and higher retention.” Newer initiatives in the quarter burned cash levels. For example, Wish Local expansion and product diversification are increasing operating costs.
In the chart, ContextLogic shares are falling toward the 50-day simple moving average. The red dot in the MACD chart shows a cross-over, a bearish signal.
ContextLogic’s strategy will pressure shares, despite the WSB buying momentum in recent weeks. The weak outlook is especially damaging to the bullish thesis.
ContextLogic forecasted Q2 revenue of $715 million to $730 million. This is below the $759 million forecasts. More concerning is the Q2 adjusted EBITDA loss. Still, its prospects depend on the Covid headwind dissipating this year.
Chief Financial Officer Raj Bahri said, “We’re cautiously optimistic about the remainder of 2021 as we have just begun to lap the initial COVID-19-related stay-at-home orders, which began in mid-March 2020.“
WISH also posted delivery times at all-time lows. Globally they are around three weeks. Plus, the shipping-related refunds are down to all-time lows. With local and total volume orders up 7% and 9%, respectively in the first quarter, the momentum may continue in the current quarter.
The company will leverage the increased order volume from Wish Express and store pickup at its Wish Local partners. Contrary to its downbeat guidance, increasing revenue will shrink losses. So, if customer buying volume exceeds expectations, ContextLogic may post a smaller than expected EBITDA loss.
On Wall Street, the average price target is $16.80, according to Tipranks. Analysts do not appear convinced on their upside forecast. Three of the five analysts have a “hold” rating on the stock. Fortunately, markets are not very bearish on the stock, either. The short float is 5%.
Level-headed investors should not buy WISH shares at current levels. The stock is at risk of re-testing the $8 support price in the coming trading sessions.
Reddit is losing buying interest, too. They prefer to chase high-flying movers like Virgin Galactic (NYSE:SPCE). Whenever the market offers another volatile stock like SPCE that weakens the buying momentum for WISH shares.
On the date of publication, Chris Lau 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.