On any given day, InvestorPlace could have several articles on the same stock but with quite different outlooks. So it is with the suggestion, from early September, from Faizan Farooque that ContextLogic (NASDAQ:WISH) has all the makings of a multi-bagger. He believes investors should buy WISH stock on the dips.
Divergent opinions make for a robust marketplace of ideas. You, the reader, get to decide. So, with that in mind, I respectfully disagree with Faizan.
WISH Stock Might Be Expensive
In August, I posited that WISH wasn’t worth more than a couple of bucks. Since then, it’s lost another 23% of its value and sits well off its February 52-week high of $32.85.
The last time I wrote about ContextLogic was in mid-September. At that point, I suggested that Poshmark (NASDAQ:POSH), the worst-performing internet stock in 2021, might be a better buy than WISH. On a relative basis since then, POSH has outperformed WISH by 15 percentage points.
I’m not saying this to pat myself on the back. I’m saying it to point out that buying stocks on the dips often only makes sense when a company is profitable and its business model is proven.
ContextLogic is neither.
He’s right. It’s had tremendous top-line growth. However, without the company’s pivot to becoming a logistics and fulfillment business for other e-commerce retailers, from an e-commerce player itself, growth wouldn’t be nearly as impressive in recent quarters.
For example, in the first six months of 2021, if you exclude its logistics revenue of $473 million, 201% higher than a year earlier, revenues fell 3% year-over-year to $955 million.
Its active buyers in Q2 2021 over the last 12 months (LTM) fell by 26% to 52 million from 70 million in the same period a year earlier. On a sequential basis, its LTM active buyers fell by 15% from 61 million in Q1 2021.
What can’t be overlooked is the $866 million spent on sales and marketing in the first six months of 2021. That accounted for 61% of ContextLogic’s $1.43 billion in revenue. But, of course, that wouldn’t be as big a deal if the company’s gross margins were higher than 57%, down 11 percentage points from a year earlier.
There’s a reason gross margins are lower. As it moves more of its revenue to its end-to-end logistics offerings — which typically aren’t nearly as profitable as apparel e-commerce — it will have to severely cut back its sales and marketing if it wants to make money.
Until the company breaks out its expense structure for its logistics business versus its marketplace business, I’m not sure how any informed investor can make a reasonable decision about ContextLogic.
A Speculative Buy at $5
My colleague is confident that the latest results are a bump in the road for the technology-focused business.
“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,” Faizan wrote on Sept. 7.
I’m not nearly as optimistic.
ContextLogic had $2.0 billion in cash and cash equivalents on its balance sheet at the end of December 2020. However, by the end of June, its cash was down to $1.4 billion. So, it’s effectively spending $300 million of its cash each quarter.
Unless something changes, cash will be down to $800 million by the end of December 2021 and reduced to near $0 by the third or fourth quarter of 2022.
Based on a market capitalization of $3.36 billion, it is currently trading at 2.4x cash. If that multiple remains the same, its market cap by the end of the year could be $1.92 billion, a 43% decline from today’s valuation.
That would put its share price very close to my $2 prediction from August.
One more lousy quarter, which my colleague reiterated is possible while the company transforms its marketplace model to a user retention focus rather than user acquisition, could be enough to send it further lower.
Buy on the dips?
At $2, if you’re a speculative investor, have at it.
On the date of publication, Will Ashworth 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.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.