ContextLogic Isn’t Worth More Than a Couple of Bucks

ContextLogic (NASDAQ:WISH) reported Q2 2021 financial results on Aug. 12. They weren’t pretty. As a result,  WISH stock has lost 34% of its value in just five days of trading. 

The logo and information for the Wish (WISH stock) mobile app are displayed on a smartphone.
Source: sdx15 /

WISH once traded as high as $32.85 in early February. Now it’s barely over $7. Ouch. 

In February, while ContextLogic was basking in its glory, I suggested that the company needed to get a board that actually cared about retail. But, unfortunately, the 12 directors have little or no connections to the retail industry. 

Don’t get me wrong; there are some impressive people on its board, including Ari Emanuel, the CEO of Endeavor Group Holdings (NYSE:EDR), which I believe is the world’s largest talent agency. He’s obviously bright. 

While I didn’t come right out and say ContextLogic was a dud, I certainly was skeptical of its business model. 

Flash-forward to July. 

I argued that WISH stock had to fall a lot further before it was worth the risk. Down 29% from my July 29 article as I write this, I don’t think there’s any doubt it’s got to fall some more before I’d consider recommending readers plunk down their hard-earned capital.

For speculative investors, $2 seems about the right entry point. Of course, I’m slightly facetious when I say this. However, if you truly feel WISH is the second coming, I recommend buying an ETF that holds the stock. The risk attached to this puppy is just too high at this point. 

Here’s why.

WISH Stock Is Not Worth $4 Billion

ContextLogic has a market capitalization of $4.4 billion at the moment. That’s based on 628 million shares outstanding. Its enterprise value is $2.4 billion based on $1.56 billion in cash on its balance sheet at the end of June. 

Its current price-sales ratio is 1.3x. You can buy GAP (NYSE:GPS) for 0.6x sales

Normally, at this point, a bullish argument would be that the higher multiple is warranted given the higher growth. However, if you look at its Q2 2021 results, you will see that growth isn’t really happening.

The company’s core marketplace revenue in the second quarter fell 32% to $378 million. Overall, its revenue fell 6% to $656 million from $701 million a year earlier. At the same time, it had an adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) loss of $67 million during the quarter, 519% higher than in Q2 2020. 

Saving the company’s proverbial bacon was a 126% increase in logistics revenue to $228 million. What’s that all about? Essentially, the company provides logistics services to the merchants on its platform. The merchants prepay for the services required per order. That’s definitely a smart way to do it. 

Wish provided logistics services for 87% of the packages shipped through its proprietary platform in the second quarter. Logistics revenues accounted for 35% of its overall revenue, up from a little over 14% in Q2 2020.

It looks like ContextLogic is moving from being a retailer to a logistics company. Logistics is hot these days, given the hit to the supply chain from Covid. Seems like a sensible pivot.

Let’s consider some of the world’s largest logistics companies. You’ve got XPO Logistics (NYSE:XPO). It trades at 0.5x sales. You’ve also got United Parcel Service (NYSE:UPS). It trades at a lofty 1.8x sales. It’s been a prime beneficiary of the growth in e-commerce. 

So, I suppose one could argue that ContextLogic should be valued closer to UPS than XPO. They’d be wrong. UPS has generated $7.95 billion in free cash flow over the past 12 months, three times more than ContextLogic’s overall sales. 

Investors are paying a major premium for Big Brown because it’s at the center of the e-commerce game. ContextLogic will have to do a lot better if it wants a multiple of almost 2x sales.

A lot better. 

The Smarter Alternative

If you read the second-quarter letter to shareholders, you will see that its monthly active users fell 22% year-over-year to 90 million while active buyers — someone who has placed at least one order over the preceding 12 months — fell by 26% to 52 million. 

Add to this the fact its gross margins fell by 1,100 basis points in Q2 2021 – likely due to the additional logistics expenses – and you can’t help but be concerned about the direction of its business.

If you bought WISH stock in the teens, you better hope and pray that this logistics pivot works. If it doesn’t, I could see the stock going to $2 or lower in no time.

If you must get on the ContextLogic bandwagon, do yourself a favor and buy one of the many online retail ETFs that exist out there or the VanEck Vectors Social Sentiment ETF (NYSE:BUZZ). WISH currently accounts for 2.1% of the ETFs $218.7 million in total net assets.   

Not only will you get your WISH, you’ll own a diversified portfolio of 75 interesting companies while also lowering your risk profile considerably. 

What’s not to like?

On the date of publication, Will Ashworth 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 Publishing Guidelines.

Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.

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