Recent Results Cast Doubt on a ContextLogic Stock Comeback Anytime Soon

Shortly before it released results for the June fiscal quarter, I made the case why ContextLogic (NASDAQ:WISH) stock was a buy ahead of its likely recovery. Many factors pointed to it seeing growth re-acceleration in the coming year. Ahead of investors falling in love with it again, WISH stock seemed like a worthwhile buy at $10.50 per share.

WISH stock
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Now, following the release of its second-quarter numbers on Aug. 12? Falling short of expectations, shares have taken a big dive.

In hindsight, given the limited information available before these results, it was a bit presumptuous to think this platform’s popularity would only plateau post-Covid, rather than see a noticeable drop in usage.

Does this development hint that this is a business in decline? It’s now more of a long-shot turnaround play, as opposed to the “oversold stock the market doesn’t understand” status it held just before the earnings report.

With the story changing in a matter of days, what’s the play here? As the short side has decided to take this opportunity to boost their short positions, rather than cover their existing position (19% of float), there may be room for another squeeze.

However, given the chances of the company disappointing again next quarter, don’t be surprised if it continues to drift lower from here.

WISH Stock and its Post-Earnings Sell-Off

Heading into earnings, investors may have expected ContextLogic to post results as indicated by its guidance. That is, lower levels of year-over-year growth, but still positive. Of course, the actual numbers for the June quarter failed to pan out that way.

Instead, sales took a 6.4% dive from the prior year’s quarter. Growth in the company’s Logistics segment helped to soften the blow. But it wasn’t enough to counter the 29% decline in revenue for its Core Marketplace unit. Besides its financials, Monthly Active Users, or its MAUs, saw a big decline as well, falling by 22%.

WISH stock sold off following these numbers, falling by double-digits in a matter of days. It seems to be finding support at $7 per share. Maybe due to the Reddit trading community diving back into it as a short-squeeze play. Or, maybe because investors are still bullish its turnaround story will play out.

There may be some logic behind buying on the Reddit community interest. High short volume in recent days indicates the short side is still betting big against it. Any bit of positive news could send it popping one more time. But outside of a quick trade? You may not want to hold this while it spends the next year turning itself around.

Long Road Ahead to Turnaround

An eventual turnaround for the company may still be possible. Just don’t expect it to happen anytime soon. ContextLogic may be making the right moves when it comes to changing its customer acquisition strategy. Essentially, it would move away from depending on heavy ad spending to acquire new customers to focusing on retaining and growing existing customers.

But as J.P. Morgan analyst Doug Anmuth put it in his post-earnings downgrade of WISH stock, “…the new product strategy could take many quarters to materialize and carries considerable execution risk.” The company itself, in its quarterly shareholder letter, admitted it likely won’t see any positive results from its turnaround game plan until at least the second half of 2022.

In the meantime, investors should expect the situation to get worse before it gets better. Suspending guidance, the company instead told investors to expect further revenue declines, and high adjusted EBITDA losses for the quarter ending Sept. 30.

So then, where’s the stock going from here? Shares will likely continue to pull back as investors get impatient about a turnaround that may or may not happen.

Again, there may be room for shares to get squeezed. Unfortunately, this hinges on the “meme stock” community diving into this with the fervor seen in June. Otherwise, the short-side fading this busted “story stock” will prevail, sending WISH stock down to mid or even low single-digits.

Not a Breather for Pandemic Winner

Just a few weeks back, it seemed as if there was enough in play to enable ContextLogic to turn itself around in a matter of quarters. Yet, after the Q2 results, it’s clear that this isn’t a pandemic winner simply taking a breather. It’s starting to look like its 2020 success was a one-time event, and that it needs to build a new business model from scratch in order to get back into growth mode.

That’s not to say its turnaround plans won’t pan out. But if you’re buying for this reason, you may want to wait before buying. Barring another “meme stock” wave, which could give the stock another temporary jolt, WISH stock will likely sell off some more before it jumps back to double-digit prices.

On the date of publication, Thomas Niel 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.

Thomas Niel, contributor for InvestorPlace.com, has been writing single-stock analysis for web-based publications since 2016.


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