The Relief Rally in ContextLogic Stock is Over

  • Last month’s relief rally took ContextLogic (NASDAQ: WISH) back above $2 per share
  • It’s only a matter of time before the e-commerce company’s poor fundamentals come back into focus
  • Investors should avoid WISH stock rather than bet on a comeback
Closeup of mobile phone screen with logo lettering of wish (owned by ContextLogic) shopping app, blurred website background (focus on center of logo)
Source: Ralf Liebhold / Shutterstock.com

Like a number of hard-hit “story stocks,” shares of ContextLogic (NASDAQ:WISH) ran up in the latter half of March. WISH stock rallied more than 26% in the last two weeks of the month. This followed a precipitous drop of nearly 90% from its summer highs.

But it looks as if the relief rally has fizzled, with WISH stock down around 6% so far in April, as fundamentals come back into focus. That’s bad news for the e-commerce company, with its lackluster operating performance. Even worse, there’s little indication that the company’s turnaround strategy, which entails transforming its business model, will result in improved results.

Taking this all into account, there’s a slim chance shares make a meaningful price recovery. The best move here, as it’s been for months, is to stay away.

WISH ContextLogic $2.12

What’s Behind the Price Action in WISH Stock?

For the past month, ContextLogic’s fundamentals have been put on the back burner. Investors have instead been focused on what the Federal Reserve will do with regard to interest rates and reducing its balance sheet, and how its actions could impact rising inflation. Updates from the central bank helped to clear some uncertainty and fueled the March rally.

But the market’s response to this week’s Fed update detailing the minutes from its March meeting has been mixed. And, as you might guess, it is the riskier assets, like WISH stock, that investors are selling. In the past two days, shares are down more than 8%.

I believe WISH stock could easily continue to sell off, giving back all its March gains, and then some. That’s because its most recent earnings results provide little reason for shares to be on an upward trajectory.

Few Signs That ContextLogic’s Turnaround is Working

In recent months, ContextLogic’s management has been at work on a sweeping turnaround plan. This follows the company seeing its high revenue growth turn into declines, its operating losses swell, and WISH stock taking a double-digit percentage plunge.

No longer able to use heavy ad spend to drive traffic and sales on its Wish.com platform, the company is going with a new approach. It has slashed its ad spend and is prioritizing user experience and merchandise quality. The issue is that, so far, it has little to show for its efforts.

Sure, the reduction in ad spend is having an impact. But while this has resulted in far lower adjusted EBITDA losses, it has also resulted in revenue continuing to drop. During the fourth quarter, revenue fell by 64% year over year. Meanwhile, while ContextLogic is cutting costs further by downsizing its employee headcount, the timeline to profitability is unclear.

It remains to be seen whether reduced spending on advertising will enable ContextLogic to not only get out of the red but also sustain (and grow) its current valuation.

Even at today’s low prices, WISH stock has a market capitalization of $1.4 billion. Although a large percentage of this is represented by its cash position of $1.16 billion, much of this cash could get expended in its restructuring efforts.

The Bottom Line on WISH Stock

A lot hinges on how much of ContextLogic’s cash position it holds onto over the next few quarters.

I doubt WISH stock is at risk of a pullback like we saw over the past 12 months (down 85%). But shares could make a trip back to their low of $1.60, which is 25% below the current price.

While downside risk may be moderate, upside potential looks minimal. Even if the company manages to resize the business to the point where it’s profitable, this may not result in a business that, combined with the cash position, is worth much more than today’s valuation.

Barring a turnaround that unexpectedly goes very well, don’t count on another big jump in WISH stock.

On the date of publication, Thomas Niel 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.

Thomas Niel, contributor for InvestorPlace.com, has been writing single-stock analysis for web-based publications since 2016.


Article printed from InvestorPlace Media, https://investorplace.com/2022/04/the-relief-rally-in-wish-stock-is-over/.

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