I am neutral on the global e-commerce platform ContextLogic (NASDAQ:WISH). With its highly visual, entertaining, and personalized shopping experience, it differentiates itself from other e-commerce platforms. It was one of the many meme stocks that gained momentum last year. However, more recently, WISH stock is not doing so well.
The shares are down nearly 90% from their highs. This is not something that most investors will be happy about, especially considering how much worse things have gotten for the company in terms of valuation and revenue growth prospects over time. The company has issues with counterfeit and substandard merchandise, leading to their first annual revenue decline last year. Additionally, the founder and chief executive officer of this company has been in charge since day one, but now he is stepping down. We do not have an update regarding a replacement as of yet.
At the same time, third-quarter ( Q3) results did not repose confidence in the brand. The outlook for the fourth quarter is also not encouraging, with revenues expected to trail Q3. Despite Thanksgiving and Christmas holidays — traditionally a very strong season for the company — the lackluster revenue guidance is cause for concern. ContextLogic has ambitious plans to change the way people shop completely. The company’s strategy is based on leveraging its data insights and providing a discovery-based shopping experience for consumers worldwide, all while remaining affordable. ContextLogic can make 70% of all sales discovery-led with its powerful algorithm. However, a combination of re-openings, sluggish marketing spends and counterfeit products are severely denting the platform.
Unless these issues are addressed, employ a wait-and-see approach with WISH stock.
French Regulatory Activity Highlights a Real Problem
French authorities have asked search engines and online platforms to remove Wish due to the hazardous merchandise on their platform. This decision comes after many reports claiming the company has substandard products on its site. The French government has been investigating several online operators. The Wish site is one of many that is coming under scrutiny. The Consumer Watchdog agency found many dangerous products on it, causing them to take action.
Wish’s prices are low because it has a lot of Chinese merchants who can take advantage of labor laws and a cheap workforce. Nevertheless, consumers may experience poor customer service. And the product quality is not up to par with other more prominent American companies. Based on their study of 140 products from Wish online, the authorities deem that 45% of toys are unsafe and 90% or more of electronic goods are hazardous. They also noted an alarming rate of cheap costume jewelry.
ContextLogic is addressing the issue of low-quality products by implementing new standards on its platform. This will allow for verified sellers who offer authentic products and services an opportunity of increased exposure, which could lead to more customers buying what they sell. Higher quality control means higher customer retention and conversion rates. This would potentially stop Wish’s monthly active users from declining.
The company has been struggling with product quality. If they don’t take care of this problem soon, it could lead to a wonderful opportunity being lost forever. Wish is a great site to buy from. But there have been some problems with orders being fulfilled incorrectly and sizes not matching what was ordered. Moving forward, if this area doesn’t improve significantly, WISH stock is in big trouble.
Cash Burn Is Another Concern
The company’s revenues grew by $1.8 billion during the nine months ending September 2021. But the company’s negative cash flows from operations over the last year were almost one billion dollars. Investing in this company would be a huge risk because it heavily depends on China, where most merchants are based. The site has had many problems with delivery times and quality for products purchased by customers.
The company still holds $1.2 billion of cash and equivalents and almost zero debt or borrowings under its revolver, which will benefit future growth initiatives if needed. The company has been grappling with depleting profits, sluggish revenue, increasing churn rates and decreasing cash balance.
Investors are surely thinking about how ContextLogic might raise more cash in the future. Generally speaking, listed businesses can take on debt or issue shares to get new money for their company. Ian Bezek pointed out in his article that the revolving credit facility requires a minimum liquidity financial covenant of $350 million. Based on recent results, it seems that ContextLogic is losing about $100 million per quarter. That gives it a limited amount of cash to play with, which is a real problem.
WISH Stock Will Keep Struggling Unless Something Radical Happens
The internet has made it possible for anyone anywhere in the world to purchase anything they want online. This is why ContextLogic’s unique strategy of leveraging their data insights with an affordable and entertaining e-commerce experience makes them stand out from other companies that offer similar services by providing customers with better shopping experiences than what traditional brick-and-mortar stores offer nowadays.
A good business model should generate growth in the number of users. If this isn’t happening, it’s an indication that there may not be enough value for people to continue using your service, so they don’t stick around long-term, which means less revenue down the line. There are not enough signs that things are moving in the right direction for WISH, which means the stock will not recover anytime soon.
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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 in analyzing the stock market and was a former data journalist at S&P Global Market Intelligence. You can check out his analysis on InvestorPlace and TipRanks.