ContextLogic: The Good, the Bad, and the Ugly

ContextLogic (NASDAQ:WISH) is an e-commerce company which operates the shopping app Wish. WISH stock hit the Nasdaq with high hopes in 2020. By early this year, shares had soared to $32 each as traders rushed to buy what seemed like a clear e-commerce winner.

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

Then it all went south. The company’s rapid revenue growth abruptly reversed. The management team which seemed so smart now appears to have blundered; in any case, the CEO is exiting the firm. And all hopes of a short squeeze have disappeared.

The Wall Street Bets crowd loved WISH stock this summer, but the community has turned its attention elsewhere amid ContextLogic’s unrelenting decline. But at just $4 per share, is this finally the time to give the ailing firm a second chance? Here are the pros and cons of a potential investment in WISH stock.

The Good: Cutting Its Losses

There’s a famous adage: When you’re in a hole, stop digging. ContextLogic has taken it to heart.

The company has been losing hundreds of millions of dollars in recent quarters due to its aggressive marketing budget. But, as the company disclosed earlier this year, the marketing isn’t having the same impact that it used to. In particular, advertising prices on Facebook (NASDAQ:FB) have increased, making it a much less compelling return on investment to source traffic from paid ads there.

Thus, ContextLogic has bitten the bullet and reduced its ad spend. This obviously hurts the company’s growth and brand outreach. However, it does slow the bleeding on the income statement. This past quarter, ContextLogic lost just $64 million overall and came fairly close to breakeven on an adjusted EBITDA basis.

Meanwhile, ContextLogic has $1.1 billion of cash left on its balance sheet. That gives it a decent runway to try to fix the business before it would need to raise more money.

The Bad: Unclear Sales Trajectory

The downside of reducing advertising spend is that it cuts off ContextLogic’s growth path at its knees. Until this summer, investors had viewed ContextLogic as a steady growth story. Sure, there might be a modest deceleration of growth as stay-at-home tailwinds diminished. However, no one expected ContextLogic to not be able to grow anymore at all.

And yet, just a couple of quarters later, not only is ContextLogic not growing, it’s actually seeing a sharp decline in revenues. This past quarter, ContextLogic brought in just $368 million of revenue which was a 39% year-over-year decline.

As if that weren’t bad enough, things are set to get worse. In the company’s Q3 earnings press release, it warned that: “While we are not providing Q4 revenue guidance, we expect Q4 revenue to be below Q3 despite the holidays.” Further to that point, ContextLogic noted that revenues have trailed off roughly another 20% in October versus Q3 levels.

This points to the company only producing something along the lines of $300 million of revenue per quarter going forward, or $1.2 billion annually. Meanwhile, the analyst consensus estimate is still $1.8 billion of 2022 revenues followed by a rebound to $2.5 billion in 2023. It’s unclear if the analysts are just slow in updating their models or what, but given ContextLogic’s slumping numbers, it seems people are still too optimistic for the company’s sales going forward.

The Ugly: The CEO Is Leaving Amid Unclear Business Strategy

Nowadays, there are a million online shopping apps. A company needs something unique or innovative to stand out from the crowd. At the time of the WISH stock initial public offering (IPO), the company’s superior algorithm was supposed to be this competitive advantage. ContextLogic had the secrets to understand consumer behavior, or so investors thought.

ContextLogic’s 2021 operating results clearly call that into question. And if you needed another red flag, just look to the executive suite.

Founder and CEO Piotr Szulczewski announced that he’ll be stepping down in early 2022 as soon as a replacement can be found. It’s never a great sign when the founder of a firm steps aside. That’s especially true when a company’s stock price is near its all-time low. This is the sort of time when you’d like to see the company leader reassure the market with a credible turnaround plan. Instead, Szulczewski is turning over the reins.

WISH Stock Verdict

In the past, I’ve tried to look on the bright side of WISH stock. However, it’s getting harder and harder to come up with much of a positive outlook on this situation.

The company has slashed its operating expenses that at least gives it time to try to come up with some sort of comeback plan. Perhaps the new CEO, once hired, will be able to come up with something. However, with ContextLogic already warning investors that this holiday season is going to be a bust, there’s no rush to buy WISH stock here. This is a wait and see situation to revisit in 2022.

On the date of publication, Ian Bezek held a long position in FB stock. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek.


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