Why It Isn’t Time to Give Up on ContextLogic Just Yet

ContextLogic (NYSE:WISH) stock has been a nightmare lately. WISH stock completed its initial public offering (IPO) in December 2020. The stock jumped a quick 50% to $30. Since then, it’s tumbled 80% below its peak. The discount retailer’s shares went into the bargain bin at alarming speed.

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

Source: sdx15 / Shutterstock.com

The company is currently plagued by skeptics and short sellers who say that it will never reach profitability or implement a working business model. That’s certainly possible. However, despite the shellacking that the shares have taken over the past few months, there are still a few valid bullish arguments for ContextLogic.

Company’s Earnings Continue to Weigh on Sentiment

The bears have certainly been winning the debate about WISH stock recently. They emphasize the company’s financial results and its lack of profitability. I’ve been bullish on the shares recently, but there’s no getting around the company’s brutal second-quarter earnings report.

ContextLogic lost a ton of money in Q2, and that’s “par for the course” for the company. ContextLogic has been investing in its future growth, after all. But now that anticipated future growth is questionable.

And in Q2, the firm’s revenue growth was almost nonexistent. ContextLogic’s management blamed the stagnation on a variety of factors, such as high prices for advertising.

ContextLogic also needs to improve its logistics operation.  Its handling and fulfillment costs currently constitute an excessive portion of its revenue. Given ContextLogic’s focus on selling goods at ultra-low prices, it needs to be more efficient. Otherwise, the company will keep generating  large losses and disappointing its shareholders.

A Clever Business Model or a Value Trap?

ContextLogic’s discount shopping approach is controversial. Bulls liken it to an online treasure hunt. They say that people enjoy the excitement of discovering new, unpredictable, low-priced goods. At a time when some consumers aren’t going to garage sales, antique stores or similar venues, ContextLogic can fill the void at an attractive price point.

Bears, on the other hand, argue that the company’s business model is based on a fad. After all, they say, much of ContextLogic’s business consists of simply selling shoddy merchandise from overseas manufacturers to American buyers.

People may shop on ContextLogic for awhile, but after receiving low-quality goods from the website, they tend to go elsewhere. The company, however, is aware of that issue and is including more trustworthy brands in its product mix.

Reasons for Optimism

During the company’s Q2 earnings call, management clearly described what has gone wrong for the firm and how it intends to improve the situation. For one thing, its advertising costs were excessive as many small businesses started buying digital ads again.

As a result, ContextLogic advertised less, causing its revenues to come in below expectations. However, the sharp increase in the demand for ads, sparked by the reopening of economies, should level off. Meanwhile, ContextLogic has had more time to adjust its customer acquisition strategy.

The company’s investments in logistics should also start to pay off in future quarters. With the holidays coming up, ContextLogic will have a chance to demonstrate the effectiveness of its operational improvements.

Meanwhile,  6% of the company’s shares continue to be held by short sellers. Although that’s not a huge percentage, it could cause WISH stock to pop if a significant number of  bullish buyers of the shares emerge. And, as InvestorPlace contributor Chris Tyler pointed out, the social media activity focusing on WISH stock remains elevated.

The Verdict on WISH Stock

The bears have certainly been winning the debate about ContextLogic, both in terms of its fundamentals and its stock price. If ContextLogic can’t fix its problems within the next couple of quarters, most bulls will probably give up on it.

That said, at this point, it seems risky to keep betting against WISH stock. The company has a clear and understandable strategy to fix its existing problems, and the seasonally strong Q4 is coming up soon.

With the high short interest in the name and the persistent interest in it by WallStreetBets participants, it could regain “meme energy” at any point.

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.

Article printed from InvestorPlace Media, https://investorplace.com/2021/09/why-it-isnt-time-to-give-up-on-contextlogic-just-yet/.

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