Traders are wishing things had turned out differently. ContextLogic (NASDAQ:WISH) looked like a promising stock when it completed its initial public offering at $24 in December. WISH stock quickly rallied to $33 as investors piled into the hot new e-commerce name.
However, things quickly derailed. By this summer, WISH stock had slumped to just $7.50. However, the short squeeze traders found ContextLogic and gave it a valiant effort. Shares of WISH leapt to $15 in short order.
Now, though, ContextLogic is sliding once again, recently falling back to $10.
Meme Traders Move On
Our Chris Lau recently highlighted the primary problem for WISH stock. Simply put, the Reddit traders have largely given up on the name. As Lau noted, Reddit used to be abuzz with memes and discussion around ContextLogic’s prospects. However, this has started to fade.
In addition, the company’s short interest as a percentage of float has dipped sharply. This suggests that most short sellers have taken their gains as well. If Reddit traders are focusing on other stocks and short sellers have closed out their bets as well, WISH stock will see a fall in trading volume.
Indeed, that appears to be what is happening. In light of that, it’s not surprising that the share price has been sluggish in recent weeks.
Strong Top Line, Weak Profitability
The fundamental issue around WISH stock relates to profit margins. ContextLogic is growing at a tremendous clip. If analyst estimates for this year are right, the business will have doubled in size between 2018 and the end of this year. Indeed, ContextLogic is looking at $3.2 billion of revenues for this year. That figure is set to rise to $4.5 billion in 2023. The company’s market capitalization is less than $6 billion, making shares look compelling on a revenue basis.
On the other hand, ContextLogic is losing money. Lots of it, in fact. This past quarter, the company generated $772 million in revenue, which was up 76% compared to the same quarter last year. However, it ran an EBITDA loss of $79 million for the quarter, which was significantly larger than in the same period in 2020. Making matters worse, the company generated negative cash flow of $354 million from operations.
To be fair, this is a seasonal business and will do better around the holidays. Still those profitability and cash flow figures aren’t too pretty.
The question is how strong a brand ContextLogic is building. Right now, the company spends a tremendous portion of its revenues on marketing. It’s paying off in terms of generating far more shoppers and revenues. But will the company be able to flip a switch at some point, turn down marketing spending, and still keep the business growing? If so, shares could be a bargain here. It seems, however, that investors aren’t yet willing to give the retailer the benefit of the doubt.
WISH Stock Verdict
ContextLogic has some obvious problems. Even most WISH stock bulls won’t deny that. However, shares are down roughly 60% from their IPO price in December 2020. That’s a pretty steep haircut versus its original price.
Has ContextLogic’s outlook really deteriorated so greatly that it should have lost more than half of its value in under a year? Probably not.
The meme energy around ContextLogic has become a bit of a distraction at this point. Maybe there will be another short squeeze; that’s hard to predict. However, in this market that loves growth so much, it’s hard to think that WISH stock will slide much further when shares are already at just 2x sales here.
ContextLogic is building its business quickly, and as long as there is a plausible path to profitability, shareholders are likely to reward the aggressive risk-taking.
WISH stock is not without risk. But there is a solid case for owning it that goes well beyond the memes.
On the date of publication, Ian Bezek held a long position in WISH stock. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek.