For a short while at the start of summer, ContextLogic (NASDAQ:WISH) stock looked as though it would erase its post-initial public offering slump.
Reddit’s r/WallStreetBets subgroup liked WISH stock for its ticker name and nothing more. Speculators bet that the e-commerce site would become the next Amazon.com (NASDAQ:AMZN).
Without a moat that would differentiate its business from Amazon, Wish’s very weak quarterly earnings will send the stock to new lows. Why did a small drop in year-over-year revenue lead to a ten-fold increase in losses?
ContextLogic posted revenue falling by 6% year-over-year to $656 million. This led to losses widening to $111 million. Adjusted EBITDA fell from $16 million last year to negative $67 million.
Consumers are realizing that buying products on Wish is not worth the small savings. For example, an Amazon customer with a Prime membership may get the order by the next day.
On Wish, the same product will have shipping costs and could take up to two weeks. The customer could have the goods shipped to a nearby store to save more.
ContextLogic’s falling revenue suggests that visitors will not bother with the extra effort to save a few dollars. Without a major differentiation against the competition, shopping activity on Wish will fall.
A Closer Look at WISH Stock
Founder and Chief Executive Officer Peter Szulczewski said on the conference call that the company faced several macro and company-specific headwinds.
For example, loosening stay-at-home restrictions led to consumers spending less time on the Wish app. This hurt engagement and conversion rates. The firm then faced higher customer acquisition costs.
ContextLogic must increase its marketing efficiency to offset the business slowdown. Retention is another major challenge.
“We weren’t successful in improving logistics as evidenced by lower customer complaints related to logistics and shipping reasons not being the number one reason any longer for customer service requests or complaints,” Szulczewski said.
Customer satisfaction is the number one metric for growing sales per customer. The company’s poor service quality will require more resources. Hiring staff will increase costs and pressure operating earnings.
Core Marketplace revenue fell due to macroeconomic headwinds mentioned above. Before it invests more in marketing, it will need to increase customer engagement with minimal effort and costs.
On the supply side, ContextLogic is putting its effort into providing the best logistics solutions for its merchants. This includes offering a more reliable logistics solution, leveraging on volume cost savings and optimizing order flow.
The company recognized the limited advantages in its logistics. It also gave few details on how it will maximize the value of the logistics unit for shareholders. This uncertainty will weigh negatively on the stock.
Analysts asked ContextLogic if spinning off the logistics business is an option, but Wish’s local store pickup (through Wish local) is still in the growth phase. It is only around 10% of the total order volume. Until it gets bigger, like in Mexico at over 50% or Spain at 27%, this option will not increase shareholder value.
Price Target for WISH Stock
Last week, analysts rushed (albeit too late) to downgrade WISH shares. Based on data collected from Tipranks, the lowest price target is $5.00.
One analyst reiterated a “buy” with a $19 price target. That is an outlier. ContextLogic will likely lose investors in the weeks ahead. Its stock will re-test new 52-week lows in the next few months.
Chances are low that Reddit’s subgroup will buy the dip on WISH. Without any fundamentals supporting the growth story, the market’s infatuation with this company appears over. Furthermore, Nasdaq is losing momentum as traders buy mega-cap stocks instead. Soon speculations like ContextLogic will be a distant memory.
Investors should not buy the dip. Instead, consider watching the stock and waiting until the next quarter’s report. If, by then, management does not turn the website business around, stop following this stock.
Technology investors have better e-commerce companies to consider instead. This includes Amazon.com, especially after the stock dipped after its quarterly earnings report.
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.
