While the novel coronavirus pandemic imposed severe economic damage across the globe, some segments certainly fared better than others. In particular, services that offer online transactions saw a significant boost, which is why ContextLogic (NASDAQ:WISH) stock is so perplexing.
Rather than screaming higher, WISH stock is down 62% for the year.
An e-commerce platform that facilitates sales between individual buyers and sellers, ContextLogic in theory should enjoy robust user growth and engagement. Since the start of the pandemic, online sales as a percentage of total retail transactions averaged approximately 13.6% on a quarterly basis since the first three months of 2020.
Right there, that should be a reason to acquire WISH stock.
For context, in the fourth quarter of 2019, the above metric measured “only” 11.4%. Put another way, e-commerce has been a burgeoning segment since the advent of the internet. But the pandemic lit a fire under online merchant places. So, why the disappointment in WISH stock?
As my InvestorPlace colleague Muslim Farooque stated – and rather bluntly, I might add – ContextLogic suffered a disastrous outing for its Q2 2021 earnings report.
Specifically, he wrote that:
Long-term growth drivers are in place, but its troubling fundamentals and business risks have me concerned about the stock’s potential. There’s no sugarcoating this: ContextLogic’s second-quarter earnings card was bad. Its revenues fell 6% on a year-over-year basis to $656 million, missing over $60 million estimates.
Additionally, Farooque added that “Its net loss increased from $11 million to $111 million and missed estimates by considerable margins.”
In my opinion, the glaring vulnerability is that “the company’s monthly active users (MAUs) dropped 22% from the prior-year period to $90 million in the quarter. Quarterly active buyers tanked 44% to 17 million as well.”
Trying to Explain Things Makes WISH Stock Look Worse
Of course, everything nowadays revolves around the pandemic. Although ContextLogic’s business may have benefited from the initial volley of infections, the gradual acclimatization to the new normal apparently placed pressure on WISH stock.
That’s not my take but rather the company’s leadership team. According to ContextLogic’s Form 10-Q filed with the Securities and Exchange Commission, management explained the reduction in active users and engagement as follows:
MAUs decreased approximately 22% and 16% from the three and six months ended June 30, 2020 to the three and six months ended June 30, 2021, respectively, which we believe was primarily driven by a decrease in overall mobile usage as stay-at-home restrictions eased around the world and lower marketing efficiency as the costs to advertise on key digital platforms increased.
I grabbed the above quote from page 21 if you’d like to follow along. On the surface, this sounds like a reasonable explanation. But just a few paragraphs earlier, ContextLogic explains that its “model relies on cost-effectively adding new users, converting those users into buyers and improving engagement and monetization of those buyers on Wish over time as well as adding new merchants, delivering economic success for those merchants, and having those merchants use more of our end-to-end platform.”
To me, this sounds like an admission that the company’s core business model isn’t working. Naturally, this will raise concerns about the upcoming Q3 earnings report. Additionally, ContextLogic really ought to be improving sales, not going backward.
Yes, I understand that the comparison to Q2 2020 isn’t favorable because 2021 is the year of initiating the recovery. But so what? A return to normal implies that our economic circumstances will normalize as well. Therefore, why would that be a negative for WISH stock? It really should be a positive.
Don’t Take the Trap of Low Expectations
My colleague is concerned about how ContextLogic will fare in the next quarterly report and I’m right there with him. I concede that the company now has to compete with the brick and mortars for users but again, so what? E-commerce overall has been a thorn on physical retailers’ side for decades.
And it’s not like the industry of people buying stuff from each other online is about to fade into irrelevance. No, if anything, it’s only getting more relevant. That being the case, ContextLogic’s poor earnings report seems to suggest that without a gun to customers’ heads – the gun being the coronavirus in this analogy – they will gravitate toward superior alternatives.
Now, it’s not all bad news. ContextLogic plies its trade in a viable ecosystem which entails that the company has an execution problem. Those challenges are easier resolved than being in the wrong industry altogether. But unless you envision management turning things around right quick, I’d be extra cautious about WISH stock.
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.