ContextLogic Is an E-Commerce Stock to Avoid This Year

ContextLogic (NASDAQ:WISH) stock has cratered along with the rest of the tech industry. However, a lot is its own undoing, with its recent results showing the effects of the post-pandemic headwinds. Its top-line continues to contract and with massive cash burn levels. Unless it finds ways to improve conversions and expands into other profitable areas, it will continue positing unimpressive revenues and profits. Hence, WISH stock is in for a tumultuous time ahead, and its best to avoid it at this time.

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

The company’s fourth-quarter results show that customers are abandoning its shopping platform in droves. Its key metrics, including sales, users and cash flows, have declined considerably. Therefore, the pandemic-led tailwinds have faded away completely, leaving ContextLogic in a major spot of bother. Moreover, WISH stock isn’t dirt cheap either, trading over 1.5 time’s forward sales estimates, ahead of the sector average.

Deplorable Fourth Quarter

Wish, ContextLogic’s discovery-based shopping platform, posted highly discouraging results to close out the year. Revenues of $289 million saw a 63.6% drop from the prior-year period. Moreover, its monthly active user growth followed a similar pattern, dropping 58% from last year’s same quarter to 44 million users. The platform’s dwindling user growth is a cause for major concern, as it shows that the firm is still in disarray after the pandemic fades. The company was among the pandemic darlings, but with the crisis on its last legs, it seems to have no answers to the challenges in the post-pandemic scenario.

Consequently, its bottom-line has suffered immensely, reporting a $58 million loss in the fourth quarter. The firm is trying its best to look for ways to increase efficiency and cut down costs. It has laid-off staff and cut back on advertising efforts to limit operational expenses. Its strategy is unlikely to pay off until there’s a turnaround in its top-line performance.

Furthermore, the firm’s cash reserves are draining swiftly, as it showed a 50% depletion rate at the end of December to $1 billion. However, it doesn’t have any debt on its books, which is a plus point. Nevertheless, if it continues to burn cash at its rate, the firm is likely to run into a major liquidity crisis.

Bleak Outlook Ahead

ContextLogic’s future will be incredibly dim if it fails to do something drastic with its business. Its business model is precarious and offers little value to investors looking for high-quality products and services. The merchants listed on its platform are based in China, so the platform obtains strikingly low prices compared to its peers. However, these products are usually of low quality. Additionally, there have been multiple reports of fake items sold on its platform.

Unless it restructures its business and improves its services, the firm will end up in deep waters. It might even have to liquidate its business if it fails to turn things around within the next couple of years. Its cost leadership strategy will need to change if it hopes to mount a comeback. Most companies operating such a model need tremendous scale to achieve profitability. A slowdown in revenue growth puts its strategy at risk.

Bottom Line on WISH Stock                  

ContextLogic is an e-commerce company in decline. Its recent results evoke a premonition of a rocky road ahead to recovery. It’s now forced to cut costs in hopes of finding a solution to its cash flow problem. Moreover, it needs to find a way to revitalize its business before things get to the point of no return. It’s an incredibly risky investment that should be left alone at this time.

On the date of publication, Muslim 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

Muslim Farooque is a keen investor and an optimist at heart. A life-long gamer and tech enthusiast, he has a particular affinity for analyzing technology stocks. Muslim holds a bachelor’s of science degree in applied accounting from Oxford Brookes University.


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