ContextLogic (NASDAQ:WISH) stock stunned its investors with a terrible Q2 earnings report.
The company’s revenues actually fell 6% year-over-year. Its net loss widened. ContextLogic offered subdued guidance going forward, as well.
Add it all up, and this was about the worst possible outcome for WISH stock owners.
Shares plunged from $9 to $7 on the release, and have settled in the $6.50 range subsequent to that earnings report. All the Reddit memes in the world haven’t been enough to revive WISH stock thus far.
But is ContextLogic beyond salvation? Here’s what went wrong and how the company could potentially make a comeback.
Wish’s Achille’s Heel: High Advertising Cost
Listening to ContextLogic’s quarterly conference call, one comment jumped out from CEO Peter Szulczewski:
“Despite low engagements the cost of digital advertising on leading ad platforms, which historically have generated a lot of demand and conversion of new and existing buyers on our app continue to increase during Q2. In fact, CPMs [cost per thousand impressions] on one ad platform were up nearly 50% year-over-year.”
This is simply a gigantic problem. Companies such as ContextLogic are having to pay as much as 50% more for advertising this year than they did last year. Recall that many advertisers stopped running ads last year. A restaurant, concert venue, or local store, for example, had little reason to run ads in mid-2020.
Now, though, those advertisers are back on Google (NASDAQ:GOOGL) and other ad platforms in a big way. Since there is a limit to how many ads a consumer can be shown, the price of ads goes up when more people are competing for those slots. As a result, ContextLogic had to pay up for attention.
Judging by the company’s dismal results this quarter, the advertising simply didn’t generate an acceptable return on investment.
Management mentioned that ad prices particularly spiked on Android devices, causing ContextLogic’s proprietary data system to reduce ad-buying.
This will be a fascinating trend at other e-commerce companies as well. Was much of last year’s sizzling growth simply due to being able to buy digital ads at unusually low prices? If so, traders may be punishing WISH stock too much for an industry-wide hiccup.
Improving the User Experience
ContextLogic is making several moves to try to turn its business around. Given the higher cost of advertising to find new customers, casting a wide net through marketing no longer is the most practical approach.
Rather, ContextLogic wants to make more of its existing user base.
A big issue with ContextLogic is low-quality goods. Wish aims to give users a treasure hunt experience, finding unexpected bargains. However, this is sometimes offset by shoddy merchandise.
Wish has deployed changes in its app to reward sellers who consistently earn high reviews and create positive user interactions. It is also prioritizing adding some better-known brands into the product mix.
Additionally, ContextLogic is investing heavily in logistics to achieve faster shipping times. E-commerce nowadays requires rapid delivery, and Wish hasn’t kept up. However, management is aware of the problem and is moving to try to close the gap.
All that said, it will take the company more funds to improve its shopping experience. Given that the company already generates large operating losses, investors may lose patience with the company as it undergoes its self-improvement effort.
WISH Stock Verdict
As someone with a bullish position in WISH stock options, this quarterly earnings report was deeply disappointing. Nothing in the company’s prior results hinted at such a drastic decline in business this quarter.
Management will have to do a lot to win investors’ confidence back after this.
Not helping matters, much of the shareholder base is here because of the “WISH” ticker symbol and related memes. It may not be a group of shareholders that is deeply concerned with fundamentals or the company’s business outlook.
However, the dropping share price diminishes the energy around the stock. Many meme traders are giving up on underperforming shares and switching to cryptocurrencies instead.
All that said, ContextLogic still has the resources — most notably, a strong user base — to turn things around. Shares have come down sharply enough from the initial public offering (IPO) that bargain shoppers will be giving WISH stock a look. There are the pieces here for a rally in the coming weeks.
On the date of publication, Ian Bezek held a long position in ContextLogic via naked short Jan’ 22 $7.50 WISH puts. 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.