Doubtlessly, I made a horrible call on ContextLogic (NASDAQ:WISH) stock in June 2021, driven by my overestimates of the company’s strengths and my underestimates of the importance of its weaknesses and threats.
While I’m now cautious on the company’s short-term outlook, I still believe that it could make a huge comeback in the longer term.
Overestimates and Underestimates
I thought that the company would continue to grow rapidly, driven by its expansion to new geographic areas and the affordability of its products.
I also believed that the stock’s valuation had become very attractive, viewed its initiatives positively, and was reassured by its impressive list of investors.
But unfortunately, I underestimated the importance of a number of factors. These include dissatisfaction with the products being sold on the company’s website, Wall Street’s lack of interest in unprofitable companies struggling to overcome tough obstacles in the second half of 2021, and rapidly rising digital ad prices. Together, these factors overwhelmed ContextLogic’s positive attributes, causing WISH stock to plummet.
Bargain-Basement Valuation and Good Strategies
Several factors lead me to believe that ContextLogic can potentially, within a year or two, make a big comeback.
First, the valuation of WISH stock has seemingly reached almost absurdly low levels. According to Yahoo Finance, the stock has an enterprise value of $1.1 billion, below its total cash of $1.22 billion, as of the end of the third quarter. So the stock’s valuation reflects the idea that the company’s business has negative value. I believe that’s far from accurate.
What’s more, I think that the company is still adopting good tactics and strategies. I believe that the company’s strategy of focusing on trying to keep its user losses from accelerating instead of spending time and money to acquire new users make sense. Of course, if new users are not satisfied with the company’s website and services, they will not stay around anyway. Consequently, it is logical for ContextLogic to dedicate itself to fixing the problems with its offerings rather than concentrating on attracting new users.
To improve the quality of the products sold on its website, ContextLogic has undertaken “to reward merchants that consistently provide an exceptional user experience,” Executive Chair Jacqueline Reses said on the company’s third-quarter earnings conference call on Nov. 10.
Specifically, merchants who get higher ratings from users will get more favorable locations on the Wish e-commerce website. With that approach, the company will incentivize its merchants to sell higher quality products and service its users more efficiently. Additionally, users will tend to see the better merchants more often.
Secondly, the company is taking more steps to remove poorly performing merchants from its website. It is endeavoring to make its website “more encouraging and entertaining and easier for our users,” Reses reported. Among the features that it’s testing are increased use of video, she noted.
Other Good Signs
And in the third quarter, 95 institutions added around 67.9 million shares of WISH stock, while 89 decreased their holdings by almost 50 million shares. So it doesn’t seem like the big money is at all ready to throw in the towel on the shares yet.
On a final note in the encouraging signs category, Reses said that she expects the company’s top line to resume growing year-over-year in the second half of 2022.
The Bottom Line on WISH Stock
With many on Wall Street still showing little patience toward companies on the comeback trail, now is probably not the best time to buy ContextLogic’s shares. And, since a new chief executive officer is slated to take the helm of the company by Feb. 1 at the latest, it makes sense to see who the firm chooses and what his or her plans are before jumping into the shares.
That said, if the company does resume growing in the second half of the year and it chooses a high-quality chief executive officer with promising plans, while the shares remain at extremely low valuations, I believe that WISH stock could be worth buying in the third or fourth quarter of 2022.
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On the date of publication, Larry Ramer did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Larry has conducted research and written articles on U.S. stocks for 14 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Among his highly successful contrarian picks have been solar stocks, Roku, and Snap. You can reach him on StockTwits at @larryramer. Larry began writing columns for InvestorPlace in 2015.