ContextLogic (NASDAQ:WISH) has been under severe selling pressure in 2021, declining 71% and trying to find a bottom as it bounced off a level beneath $5. Trying to catch a falling knife or have success in bottom fishing in stock investing is too risky. ContextLogic delivered poorly in its second-quarter 2021 earnings report in summer. With the Q3 2021 earnings report expected in early November, investors should monitor at least five key metrics for a financial turnaround.
In my previous article about WISH stock, I argued that the business model has severe flaws, including poor business operations, a suboptimal customer experience, revenue growth but lack of profits and negative operating income.
What are the five key metrics that now ContextLogic must address with success fast? All these metrics are taken from the WISH Q2 2021 shareholder letter.
User Retention and Engagement
ContextLogic started out with poor Q2 2021 earnings results as described in the shareholder letter.
“Overall, we expected user retention to improve now that we have more reliable logistics, but instead retention declined.”
The letter also address that,
“From a macro perspective, as vaccine rates increased, stay-at-home orders began to ease, and economies started to more broadly reopen around the world, daily user activity and active buyers on our platform declined more than we had anticipated, particularly in the U.S., France and Italy – three of our largest markets. In fact, globally we saw a 13 percent reduction in app installs and a 15 percent reduction in average time spent on our platform in Q2 2021 compared to Q1 2021.”
A return to how things were before the outbreak of the coronavirus crisis may take some time but hopefully, 2022 will be a much better year.
Also, demographic changes should help ContextLogic to improve its user growth metrics such as monthly active users, active buyers, and user retention on the platform.
Advertising and Marketing Costs
ContextLogic reported that “the cost of digital advertising on leading ad platforms, which we historically have used to drive demand and conversion on our app, increased more than we expected. … These rising digital advertising costs contributed to lower marketing efficiency.”
The algorithms used for marketing purposes decreased the advertising spend, and that led to lower revenue. Due to poor performance in the marketing strategy, ContextLogic has set out to focus on enhancing the product quality.
This will ultimately improve the shopping experience and the performance of the app. In digital marketing, testing should be analytical and continuous to get the best results. By hiring Alphabet’s (NASDAQ:GOOG, NASDAQ:GOOGL) former chief technology officer and chief product officer, it hopes to maximize marketing efficiency.
Reading the following insights about the global operations of ContextLogic, it is obvious that there is a big problem. Its Core Marketplace revenue dropped to $378 million, down 32%, “primarily due to lower order volume and conversion of new buyers,” as the letter addressed.
It proceeds to say that “Active buyers during the quarter declined 44 percent year-over-year to 17 million. Core Marketplace Revenue per Active Buyer was $22, an increase of 21 percent year-over-year. On a year-over-year basis, Core Marketplace revenue decreased 21 percent in Europe, 44 percent in North America, 29 percent in South America and 21 percent in the Rest of World.”
It is an ambitious goal for ContextLogic to compete globally with other online retailers and gain market share.
The biggest decline reported was in North America. By focusing on other markets in different geographical area, ContextLogic uses valuable sources, such as cash that does not bring revenue nor profits. Maybe Europe is the primary area to focus on, as it is a very large market, and many opportunities exist for business.
Control Costs and Expenses with Wish Stock
To make a profit there are mainly two ways. Either reduce expenses or increase the revenue. ContextLogic reported that,
“Cost of revenue for the second quarter of 2021 was $272 million, a 31 percent year-over-year increase. Non-GAAP cost of revenue, which excludes stock-based compensation, was $267 million, an increase of 28 percent year-over-year. The majority of the increase was primarily due to costs related to higher volume of logistics services and an increase in headcount as compared to the prior year.”
Operating costs can either make or destroy any business. ContextLogic has seen an increase in its cost of goods sold. But selling in general and advertising expenses from the past three fiscal years makes the path to profitability a very tough one.
Profitability of WISH Stock
Contextlogic struggles to become a profitable company. The Q2 2021 earning report showed that,
“Second quarter net loss was ($111) million and adjusted EBITDA loss was ($67) million, compared to net loss of ($11) million and adjusted EBITDA of $16 million in Q2 2020.”
Although, there is a strong cash position of $1.6 billion in cash on the balance sheet as per the latest earnings report, ContextLogic must find a way to turn its revenue growth into profits. Cash itself does not add incremental value if not used in a productive way to generate growth.
One solution could be to apply a radical change of products sold online — skip the ones that return low profits, and only promote the ones that sell well and leave satisfactory profits. Again testing, analyzing, making tough and radical decisions are needed by ContextLogic now.
In my previous article, I concluded that I would give WISH stock at least a year to see a turnaround. I continue to believe so.
Until fundamentals improve, WISH stock should be avoided even near its 52-week low. It continues to be expensive based on its free cash flow history.
On the date of publication, Stavros Georgiadis, CFA 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.
Stavros Georgiadis is a CFA charter holder, an Equity Research Analyst, and an Economist. He focuses on U.S. stocks and has his own stock market blog at thestockmarketontheinternet.com/. He has written in the past various articles for other publications and can be reached on Twitter and on LinkedIn.