There’s much about ContextLogic (NASDAQ:WISH) that doesn’t inspire much confidence, it’s also fair to point out that enthusiasm for the e-commerce marketplace is quite strong. So, just on the favorable winds of the greater fool theory, WISH stock has upside potential.
The question is, what’s the probability of said potential?
If you ask InvestorPlace contributor Dana Blankenhorn, the answer is apparently not much. He bluntly stated that WISH stock is “overvalued” and “possibly full of hot air,” descriptors that typically don’t materialize if one felt confident about a particular opportunity. Specifically, Blankenhorn states that relative to revenue, ContextLogic is selling at 50% more than the top line.
In his view, that’s not acceptable because the company is not growing on the bottom line — quite the opposite. To have that kind of a premium, a prospective buyer would need to see serious justification. So far, WISH stock hasn’t delivered; hence, my colleague’s hot air reference. Essentially, that’s what you’re buying in absence of a credible narrative.
However, others take a differing view. For instance, Benzinga contributor Melanie Schaffer implied that you could gamble on ContextLogic shares on the long side of the equation, noting recently that WISH appeared to be charting “a double bottom pattern created on Aug. 19 and Sept. 15,” which has bullish implications.
Of course, the backdrop didn’t quite turn out that way. As you’ve undoubtedly heard, fears have mounted that real-estate developer China Evergrande Group (OTCMKTS:EGRNF) “might not pay its bonds this month,” per The Wall Street Journal. That triggered a wave of selloffs in companies tied to China’s property market, including BlackRock (NYSE:BLK).
But ContextLogic took a massive hit along with the rest of the market earlier this week, shedding over 7%. This raises concerns about its forward viability.
WISH Stock Wages a Two-Front Battle
While it’s possible that WISH stock could jump higher from here, I think it’s always significant when a stock betrays the implications of a well-established technical pattern. You’ll notice that technical analysts never guarantee a price move but instead talk in terms of if-then probabilities.
In this case, WISH stock will likely jump higher if the double-bottom pattern holds. But if it doesn’t hold, investors need to go back to the drawing board and assess whether the core of the original thesis applies.
The questions from the technical element segues into the fundamental aspect. Per ContextLogic’s 10-Q filed last month, “China accounted for substantially all of marketplace and logistics revenue during the three and six months ended June 30, 2021 and 2020 based on the location of the merchants’ operations.”
Basically, ContextLogic’s success depends on a healthy and robust Chinese consumer economy. Therefore, the Evergrande news isn’t what the doctor ordered.
Then again, how much of ContextLogic’s business is truly tied to what’s going on with China’s property market? I get that major economic news from that nation will impact its citizenry’s sentiment and spending behaviors. But at the end of the day, we’re talking about an e-commerce platform facilitating transactions between buyers and sellers. So, there should be some insulation from the Evergrande headwind.
On the day of the WSJ report above, Evergrande shares tanked 18.3%. So WISH stock losing 7.2% is a massive deal, meaning that it suffered 39% of the volatility of the shares that started the fallout.
That seems a bit harsh, which leads me to suspect that WISH stock isn’t really trading on the fundamentals but rather speculation. There’s nothing wrong with that, per se, but it does lead to circumstances like this, where stakeholders dump on fears that may be only loosely related to the target asset.
Time To Run To the Sidelines
From where I stand, I’m almost certain there will be some kind of bounce back. But unless you’re a risk-tolerant speculator, you might want to hit the sidelines.
Certainly, a harsh impact to China will hurt ContextLogic. But the idea that the country’s property market woes are devastating WISH shares raises a question: Are people trading on the substance of the matter or are they just reacting emotionally to fearful news?
But the kicker is that even if ContextLogic is legitimately tied to China’s property market, that’s not a comforting thought because the Evergrande issue seems very serious from a bird’s eye view.
With this new information — along with WISH’s inability to hold true to its bullish technical pattern — I’m seeing very little reason to risk capital here other than for a dangerous play on a dead-cat bounce.
On the date of publication, Josh Enomoto 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.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.