After ContextLogic (NASDAQ:WISH) reported much weaker-than-expected second-quarter results and WISH stock tumbled, I have to admit that my recent, positive calls on WISH stock have proven to be inaccurate and misguided. And yet, I still think that the shares should be able to rebound strongly over the long-term.
That’s because ContextLogic’s situation now reminds me in many ways of that of another online rising star’s predicament in 2018. Specifically, in that year, Snap (NYSE:SNAP), like ContextLogic, was also suffering from user contractions and reporting bottom-line losses. And SNAP stock bounced tremendously off its 2018 lows. In fact, Snap’s shares have soared more than 1,200% from their 2018 lows.
The Similarities Between SNAP Stock Then and WISH Stock Now
In Q2, ContextLogic reported that installations of the Wish app had dropped 13% versus Q1, while the average time spent on its platform had fallen 15% quarter-over-quarter. Meanwhile, ContextLogic reported a per-share loss of 18 cents. The company said that it would carry out “a plan designed to ensure the long-term success of our platform.”
In Q2 of 2018, Snap’s daily active users dropped 2% year-over-year, and the company reported a per-share loss of 13 cents. Three years ago, Snap said that it would respond to its user losses by revamping its recently redesigned Android app.
In 2018, most pundits and analysts were bearish on SNAP stock, but I was extremely bullish on the company, citing its strong long-term fundamentals. Today most of the Street is bearish on WISH stock, but I still think that ContextLogic’s long-term outlook is positive.
The Differences Between SNAP Stock Then and WISH Stock Now
For Q2 of 2018, Snap’s results came in above analysts’ average outlook. Last quarter, ContextLogic’s results were below the mean estimate.
Three years ago, Snap’s sales climbed 72% year-over-year. Last quarter, ContextLogic’s revenue dropped over 6% YOY, and its Marketplace sales tumbled 29% YOY.
Most importantly, in 2018, Snap did not have any real macro challenges, although unfounded worries about the tech sector dragged down its shares further in the second half of the year.
Conversely, ContextLogic seems to be caught in the midst of macro weakness that’s affecting most if not all e-commerce players. This trend, for example, has negatively affected the Q2 results of both Amazon.com (NASDAQ:AMZN) and Walmart (NYSE:WMT).
Real Macro Issues
While I had expected a downturn in e-commerce due to the reopening of economies, the weakness has been significantly more intense than I had anticipated. And the downturn has occurred at a time when various factors — including the approaching taper by the Fed, the looming debt ceiling, an upheaval in China, and a widespread perception that the market is due for a major correction — have made investors rather skittish, particularly towards companies that aren’t huge.
Given these factors, the huge decline of WISH stock in the wake of ContextLogic’s Q2 miss isn’t really surprising. Also not too surprising is analysts’ skepticism towards the name. For example, JPMorgan carried out a rare “double downgrade” of the shares, citing the sales decline and its belief that the company’s revamped approach “could take many quarters to materialize and carries considerable execution risk.”
The Bottom Line on WISH Stock
I continue to believe that there’s plenty of room for a discount e-commerce business to thrive, and I remain upbeat on ContextLogic’s logistics business, whose revenue soared 126% YOY last quarter.
Still, the depth and duration of the e-commerce weakness are tough to gauge at this point. Therefore, I advise investors to avoid buying WISH stock for now, although long-term, risk-tolerant investors can hold onto the shares they already have, as I’m sure that e-commerce’s growth will eventually reaccelerate.
And I think at some point within the next year, the shares will be worth buying on weakness.
On the date of publication, Larry Ramer held a long position in SNAP.
Larry has conducted research and written articles on U.S. stocks for 14 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Among his highly successful contrarian picks have been solar stocks, Roku, and Snap. You can reach him on StockTwits at @larryramer. Larry began writing columns for InvestorPlace in 2015.