With Busted Growth Play, ContextLogic Stock Will Continue to Unravel

With investors responding to hawkish remarks from the Federal Reserve with a relief rally, some of the hardest-hit stocks have started to bounce back. One of them is ContextLogic (NASDAQ:WISH). With its big rebound since mid-March, you may be interested in WISH stock, under the view that it’s gearing up to make a further recovery.

Wish, a ContextLogic company a worldwide online shopping app.
Source: sdx15 / Shutterstock.com

For now, shares in this e-commerce company (which operates the Wish.com platform) could continue to move higher. But in terms of a permanent move to higher prices? Don’t count on it.

Why? So far, all that it’s accomplished with its turnaround plan (more below) is severely reducing its user base. Active users have gone down. Revenue has gone down. Cash burn remains high. After burning through a billion dollars last year, it still has a billion left in its war chest.

This may be sufficient for it to keep the lights on. It may not need to dilute shareholders with a secondary stock offering. Still, as the business shrinks in size, it takes time for non-financial aspects of its turnaround to take shape? There’s little reason to own it, as heavy erosion of shareholder value is likely to continue.

Despite Bad News, WISH Stock Is Bouncing Back

Before the recent relief rally, which has sent it from just over $1.60 per share to around $2.50 per share today, it was yet another brutal month for ContextLogic investors.

On March 1, the latest earnings report for WISH stock hit the street. As expected, the company reported lackluster results. Slashing its marketing spend, it’s no surprise it saw revenues for the holiday quarter fall 64% year-over-year. While net losses were down year-over-year, negative free cash flow in fourth-quarter 2021 (-$50 million) was double what it was for Q4 2020 (-$25 million).

Worse yet, these losses aren’t expected to end anytime soon. Per guidance, for Q1 2022 (ending March 31, 2022), the company expects adjusted EBITDA losses of between $60 million and $70 million. Subsequent quarters will likely see similarly large losses.

However, with the relief rally, speculators have moved back in. This in turn has enabled ContextLogic shares to move higher. Even as investors who see the writing on the wall have or are continuing to make their exit.

Additional Declines Likely as Situation Fails to Improve

If you haven’t followed the situation with WISH stock too closely, you may be wondering why it’s losing so much, and what these heavy losses have to do with its turnaround.

In a nutshell, ContextLogic’s turnaround is focused on moving to a more sustainable business model. Starting last summer, then-CEO Piotr Szulczewski (who has since jumped ship) began to implement a plan to move beyond a customer acquisition strategy based on paid advertising, to one where it organically built and maintained a user base.

How did it plan to accomplish this? By improving Wish.com’s user experience (UX/UI). It also planned to improve the merchandise quality on its platform. Given it sounds like they had a plan in place, what’s the issue? ContextLogic has into action step one of this plan (cutting ad spend). Yet when it comes to the other steps? Based on remarks by the company’s current CEO, Vijay Talwar, on the most recent earnings call, the company is still working on both.

The issue? In the meantime, with its ad spend reduced, site traffic/sales will continue to shrivel up. This will result in a further drop in its cash position. The above-mentioned relief rally will fade and the speculators will again move on. After that, the market will resume de-rating the stock, pushing it down to a value that takes into account this shrinking of the business.

Bottom Line

Fixing the situation with ContextLogic is going to take time. Until it starts showing a modicum of progress, don’t give the company the benefit of the doubt, buying its shares simply on the hope that the situation will improve.

Much like the situation with Skillz (NASDAQ:SKLZ), this is a company that only saw incredible growth from spending far more than it took in revenue. Now, investors have wised up. They’ve realized these aren’t bona fide growth stories.

In response, the C-suites of both Skillz and this company are scrambling. They’re quickly ditching a costly customer acquisition strategy, replacing it with an organic growth strategy. But far away from starting to yield results from these changes, the situation with either one will get worse before it (possibly) gets better.

Likely to drift even lower as losses keep piling up, don’t view the recent rally as an invitation to buy WISH stock.

WISH stock earns an “F” rating in my Portfolio Grader.

On the date of publication, neither Louis Navellier nor the InvestorPlace Research Staff member primarily responsible for this article held (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.

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