WISH Stock: What a 1-for-30 Reverse Split Means for ContextLogic


  • ContextLogic (WISH) stock is declining again after the company implemented a 1-for-30 reverse split.
  • Once thought of as the next big e-commerce play, WISH has seen notable declines since its initial public offering (IPO).
  • WISH stock investors would likely be better off if management threw in the towel and liquidated the business.
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

Shares of Wish parent ContextLogic (NASDAQ:WISH) dived more than 20% on Tuesday after the firm announced plans for a 1-for-30 reverse split. Now, the e-commerce firm is seeing its value sink another 18% today.

This isn’t the first time a popular meme stock has found it necessary to reverse split shares. In 2022, Exela Technologies (NASDAQ:XELA) approved a 1-for-20 reverse split after losing 90% of its share value that year. Naked Brands also did it twice between 2019 and 2021. Every 1,500 NAKD shares eventually became worth just one.

But ContextLogic is notable for its former ubiquity among the investing public. Wish.com was once the most-downloaded shopping app, giving it the same publicity that AMC Entertainment (NYSE:AMC) or GameStop (NYSE:GME) might enjoy. And it’s no surprise that online message boards immediately lit up on the news of the split. A data issue on several sites also made ContextLogic look like a major winner.

Graph of WISH Stock on Google Finance

A mirage on Google Finance

As investors circle this once-promising firm, many are now asking:

What does the 1-for-30 reverse split now mean for WISH stock?

WISH Stock: The Decline of an ‘Amazon Killer’

Expectations were high when San Francisco-based ContextLogic first hit public markets in December 2020. The discount online retailer had just experienced 32% year-over-year (YOY) growth and analysts seemed to believe the trend could last forever. According to data from Thomson Reuters, the average I/B/E/S revenue estimate sat at $5.5 billion for 2024, a 2X increase from levels at the time. Profits were meant to roll in by 2023.

They were wrong. In 2021, ContextLogic reported that its revenue had slipped from $2.5 billion to $2.1 billion. By 2022, that figure had collapsed to $571 million, triggering a $383 million net loss. Not only did shoppers suddenly decide that $3.41 watches weren’t worth the trouble anymore; the company’s massive expenditure on digital advertising also proved a waste. When the firm cut its advertising spending by 80% in 2022, revenues declined in lockstep.

WISH gross profit vs ad spend

That suggests that Wish.com can never become profitable in its current state. The firm was spending $1 in advertising to generate every $1 in gross profits and the figure never improved over time.

By March 2023, the company had lost 98% of its original market value, making it one of the largest financial drains of the work-from-home stocks.

What a 1-for-30 Reverse Split Means for ContextLogic

Investors have long known about the “stickiness” of corporate profits. According to data from Thomson Reuters, almost two-thirds of corporate return on equity (ROE) can be explained by examining the prior year’s profit levels. In other words, profitable companies tend to remain profitable and unprofitable ones do the opposite.

That’s terrible news for ContextLogic, a firm that has long struggled to make money. The company’s advertising expenses historically consume every dollar of gross profit generated, leaving nothing for WISH stock shareholders to enjoy.

An extensive academic study backs this up. In 2005, researchers from New York University and others studied 1,600 reverse stock splits over a 40-year period. They found that companies that reverse split their shares suffered “significant negative abnormal returns over the three-year period following.” Returns ranged from -22.7% to -43.6%, depending on the model used. Even after accounting for new stock listings, rebalancing and skewness, the researchers found that stocks underperformed by an average of -36.2%.

Wish.com parent ContextLogic will likely follow that route. In his latest earnings call, CEO Joe Yan admitted that there’s “still much more work ahead to do in order to put us back on the path to profitability and growth.” And although he pledged to “improve listing quality” and trust, the plans provided only marginal enhancements like flat-rate shipping. These are not the overhauls needed to turn Wish into the next Amazon (NASDAQ:AMZN).

Even Wall Street analysts have given up on WISH stock. The average estimate now calls for a 5% decline in revenues this year, with profits remaining elusive for several more years.

Where Will WISH Stock Go From Here?

Investors in ContextLogic now face a predicament. On the one hand, the company’s reverse stock split highlights the troubles at the discount retailer. Shares could fall another 20% by 2026, using history as a guide.

On the other hand, shares of WISH stock now trade at less than half of the company’s cash (likely around $570 million to $630 million, given past cash burn rates). If management suddenly liquidated the entire company, shareholders could theoretically receive around $12 for every share owned once liabilities are paid off — a significant premium to its current $8 share price.

Even short sellers seem nervous about betting against this outsized cash pile. According to data from Fintel, short fee rates (an indicator for short share demand) have plummeted from the already-low 1% range to the even lower 0.6% one. Short shares make up only 12% of WISH stock’s float.

In September 2022, the ContextLogic board tapped now-permanent CEO Joe Yan to keep Wish.com afloat while they searched for a new chief executive. They might have been better off putting Wish.com up for sale and returning the proceeds to investors. Because history tells us that once shares of a struggling company require a reverse split to stay listed on a main exchange, it’s often better to sell and walk away.

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On the date of publication, Tom Yeung did not hold (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.

Tom Yeung is a market analyst and portfolio manager of the Omnia Portfolio, the highest-tier subscription at InvestorPlace. He is the former editor of Tom Yeung’s Profit & Protection, a free e-letter about investing to profit in good times and protecting gains during the bad.

Article printed from InvestorPlace Media, https://investorplace.com/2023/04/wish-stock-what-a-1-for-30-reverse-split-means-for-contextlogic/.

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