ContextLogic Stock Isn’t Priced Wrong, It’s Just a Mediocre Investment

eCommerce platform ContextLogic (NASDAQ:WISH) has had a rough summer. WISH stock has shed more than 43% in the past three months.

The logo and information for the Wish (WISH stock) mobile app are displayed on a smartphone.
Source: sdx15 / Shutterstock.com

Moreover, it recently reported disappointing second-quarter results in which it suffered a sharp decline in some of its key metrics.

At this point, with the uncertainty surrounding its product quality, as well as its user and acquisition issues, the near-term outlook isn’t bright. Needless to say, it’s tough to recommend investing in WISH stock at this point.

WISH stock is down more than 80% from its highs in February. With such a massive share price correction, it beckons the question of whether it’s trading at a bargain price. Based on its price metrics and industry averages, though, WISH is trading virtually in line with, and in some cases slightly higher than, the sector.

Moreover, analysts believe that the company will continue to be loss-making, and its top-line should contract by more than 10% this year.

WISH stock is trading at a fair price but is unattractive due to the challenges ahead.

The Long-Term Case Is Unappealing

Even if we look beyond the company’s current woes, its long-term case is hardly compelling. Perhaps its major concern is product quality. ContextLogic mainly focuses on unbranded products that can be deeply discounted as compared to branded alternatives across a number of categories.

This business model has led to deteriorating retention metrics and lower quality. In the second quarter, the time spent on the platform dropped by 15%.

To alleviate product quality issues, ContextLogic said that it will add more branded products to its platform. However, this is a double-edged sword.

Its focus on unbranded goods already alienates higher-income users, but now low-income users might find many of the listed products unaffordable.

Furthermore, the other key factor for ContextLogic is user acquisition, which is skewed towards costly social media platforms. Recent privacy changes for iOS have weighed in on the company’s advertising costs and campaign results which could’ve been limited with a more diversified strategy.

At this point, the company isn’t looking to diversify its user acquisition channels anytime soon. The second-quarter earnings call mentioned that it aims to slowly ramp up our growth advertising investments to reignite our new user acquisition engine.

What Should Change

The company’s management is aware of the businesses’ shortcomings and has been toying with some ideas to turn things around. Product development and general administrative expenses, for example, were up over 100% in the second quarter respectively.

A lot of it is due to the management’s measures to improve app quality. For instance, they introduced a new quality score system that rates merchants based on user feedback.

On the advertising front, it is clear that the company needs to streamline and maximize its efficiency. Its advertising model has been one-dimensional and has failed to address quality problems. The lack of a varied marketing strategy has weighed in on the company’s ability to retain users and acquire new ones.

ContextLogic’s management recently announced that it would be focusing more on user retention than acquisition.

This would involve improving quality, decreasing app latency and leaning into the social commerce realm. However, it will take a few quarters for this strategy to bear fruit.

Final Word on WISH Stock

WISH stock has had a nightmarish run in the past few months and should continue disappointing investors.

Analysts are bearish about its prospects in the coming months as its struggles with product quality and retaining its users.

ConstextLogic is not undervalued compared to its peers especially considering its lackluster fundamentals and a weak outlook. It’s best to avoid WISH stock at this time.

On the date of publication, Muslim 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.

Muslim Farooque is a keen investor and an optimist at heart. A life-long gamer and tech enthusiast, he has a particular affinity for analyzing technology stocks. Muslim holds a bachelor’s of science degree in applied accounting from Oxford Brookes University.


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