ContextLogic (NASDAQ:WISH) stock bulls are having their patience tested. InvestorPlace analysts have a distinctly bullish outlook on the company because it’s an e-commerce play targeting the value-conscious consumer. What’s not to love?
During a bullish market, one would expect companies like WISH to do well. Sadly, the bears are firmly in control of this chart.
For the value investor, this is great, though.
Why? Well, total revenues more than doubled in the last four years. And the momentum will not cease any time soon. The reason is simple. ContextLogic is focusing on an underserved niche. Millennials have surpassed baby boomers as the nation’s largest living adult generation and represent the biggest slice of the labor force.
As my colleague Josh Enomoto pointed out, this generation is not terribly brand-conscious, preferring functionality over everything else.
Companies like ContextLogic have a lot to gain in this environment. The markets, in my opinion, are overreacting in response to the quarterly results. If anything, the recent dip gives you an incentive to purchase more of WISH stock. Markets reward consistent performance and a tech-heavy operating model. So, it’s only a matter of time before all of these things combine to push ContextLogic upward.
In the meantime, you can go ahead and accumulate shares at more affordable rates.
Quarterly Results Dampen Investor Sentiment
WISH stock has been in free fall since the last earnings report dropped. The company went public at the end of last year at $24 a share. As I write this, shares are changing hands for under $8.
Now part of the reason is understandable. The e-commerce platform operator’s revenue of $656 million was below the $723 million expected by analysts and represents a 6% year-over-year drop. Even management didn’t anticipate such a hit, having guided for 3% growth.
But you have to put the numbers in context. Last year was a unique one because of the pandemic and increased stay-at-home shopping.
If you take a look at other areas, things are looking up. Logistics revenue jumped 126%, clearly showing merchants are warming up to ContextLogic. Yes, marketplace revenue fell 29% year-over-year, but that was expected. Even Amazon (NASDAQ:AMZN) and eBay (NASDAQ:EBAY) could only muster year-over-year revenue growth of just 27% and 14%, respectively, in the second quarter.
People have been cooped up in their homes for quite some time, and a return to in-person shopping is causing a change of pace. And that is also affecting the markets.
Keep Your Eye on the Ball
Another major reason the e-commerce platform did not do well in the second quarter is decreased marketing spending. Although the company has done well to increase brand awareness, it cannot afford to take its foot off the gas.
However, for now, it looks like management has other ideas.
ContextLogic said it expects its marketplace revenue to decline further in the second half of 2021 due to a reduction in digital advertising expenditures. A combination of decreasing advertising expenses and the lifting of stay-at-home orders is not the ideal recipe for sustained revenue growth.
In the earnings call, Wish’s Founder and CEO, Peter Szulczewski, had this to say:
From a macro perspective, affecting rates increased and stay-at-home orders began to ease over the past few months. Daily user activity and active buyers on our platform declined more than we anticipated. This was particularly true in the U.S., France, and Italy, three of our largest markets.
In fact, we saw a 13% reduction in app installs and a 15% reduction in average time spent on our platform globally from the second quarter of 2020.
We are also in the middle of the company transforming its business model. WISH’s newly adopted user retention strategy, as opposed to acquisition, needs to run its course. WISH wants to accomplish this business transformation through increasing product quality and variety across merchants, taking care of app latency and bugs, and “leaning into social commerce and entertaining features.” However, it will take a few quarters for this strategy to take root.
A combination of these factors is weighing down investor sentiment in the short run.
All the Right Elements Are in Place for WISH Stock
Has ContextLogic stumbled a bit coming out of earnings season? Yes, absolutely. However, many of the issues highlighted deal with short-term tactical problems, which WISH can address in due course. The broader reasons why ContextLogic remains a great stock are still relevant.
Millennials and workforce-entering Gen Z looking for affordable products are a massive demographic. Secondly, WISH has $1.6 billion of cash and marketable securities by the end of the first quarter; a lot of capital to scale operations and become cash-flow positive.
The fact that investors got spooked due to the latest earnings should not surprise. In the last few months, recovery stocks are getting most of the attention from Wall Street. While those stocks will continue to do well, undervalued plays like WISH stock also deserve a place in your portfolio.
On the publication date, Faizan Farooque 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.
Faizan Farooque is a contributing author for InvestorPlace.com and numerous other financial sites. Faizan has several years of experience in analyzing the stock market and was a former data journalist at S&P Global Market Intelligence. His passion is to help the average investor make more informed decisions regarding their portfolio.
