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Shift in Strategy Will Hurt ContextLogic Stock in the Short Run 

Certain investment trends are considered sure-shot winners in today’s market. One of them is e-commerce. So, it’s surprising that ContextLogic (NASDAQ:WISH) stock is trading at a steep discount to its IPO at $24 a share.

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

Unlike several other major e-commerce giants like Amazon (NASDAQ:AMZN) and eBay (NASDAQ:EBAY), WISH stock trades at just 1x price-sales.

There are several key reasons why this is so. First, the quarterly results did not do the company any favors. Customer experience is of utmost importance in the retail space. Unfortunately, WISH is suffering because of lackluster product quality. It is working on improving this situation. But these issues are rarely addressed overnight. Nevertheless, customers rarely spare poor quality and product defects, especially in developed economies, which are the biggest target markets for the company’s portal, wish.com.

In an earnings call, ContextLogic expressed the intention of investing time and resources into updating apps and optimizing its merchants’ quality and products. As we all know, Wish is one of the world’s largest online shopping communities with over 300 million products, and it has more than 1 million merchants on its platform. It has reduced costs by lowering markups and connecting buyers directly, regardless of brand name or popularity, for everyone involved to get their desired product at an affordable rate.

But these merchants need to be screened under a minimum standard of excellence. Considering the size of the company, it is not an easy task. However, management has experienced hands that can build on its enticing business model.

The company has the opportunity to turn things around by focusing on quality. If they do this, then I think that stock will have a chance at success again.

Operational Problems Affecting WISH Stock

Though Wish’s popularity is on the rise worldwide, developed economies dominate the user base. The U.S. contributes the most revenue to its sales across various markets, including Europe, where demand grows steadily every year. Since Wish is a U.S.-based company, having Chinese merchants make most of its vendor pool could be controversial.

North American merchants are known for emphasizing quality and brand value. Although standards are improving, Chinese standards are not as stringent. And there are several examples quoted by ContextLogic users of substandard and defective products arriving at their door. It may not irk local Chinese customers. In contrast, North American and European consumers will find exceptions to the severe quality issues on the network.

CEO Peter Szulczewski understands these issues. Hence, he, along with the management team, is looking to deter fake goods on their site. The executive is conscious of how negative consumer experiences greatly damage customer trust and hurt gross merchandise value, tarnishing brand equity.

To accomplish the task, the company is pulling back on digital ad spending. As a result, the number of app downloads is decreasing. And this trend will not let up any time soon. It will create interim headaches for stockholders. But if you are looking to invest for the long term, this is an important issue the company must address before moving forward.

Sobering Results

Due to the prevailing situation, ContextLogic is slashing its advertising budget and redirecting resources to other areas. It has dealt well with a decrease in transaction volume and rising logistics costs due to supply chain issues in China by making adjustments that are key for success.

In the second quarter, revenues fell 6% from the previous year to $656 million. Logistics segment revenue grew by 126% over the last quarter to reach $228 million; great news for customers who need products delivered efficiently and logistics providers looking for a strong platform. It helped offset marketplace revenues, which suffered a 29% decline.

App installations fell 13%, and average time spent on the platform decreased 15% sequentially. The total monthly active users decreased 22% from a year ago to 90 million. It is not surprising as the ease of stay-at-home restrictions worldwide and a revival of brick-and-mortar store visits have combined to weigh down sentiments.

Play the Long Game With WISH Stock

There are things to like and dislike about WISH in equal measure. On the one hand, you have an e-commerce play trading at a historical discount. It focuses on the budget-conscious consumer, an oft-neglected segment. The other obvious risk factor is further declining monthly active users and revenue. If the trend continues, WISH stock will have a lot of questions to answer. However, the fourth quarter is always a good one for retail companies. It will not be different this year.

Shares are already on the rise. The momentum in the last few weeks has been very pleasing. However, they will rise exponentially once the forthcoming earnings report is released.

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 analyzing the stock market and was a former data journalist at S&P Global Market Intelligence.


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