I am bearish on ContextLogic (WISH), but for high-risk tolerant investors, WISH is challengingly attractive.
The stock went public 11 months ago at $24 and climbed to $32.85. The share price collapsed during 2021. It closed recently at $4.39. The average ContextLogic price target, at $5.10, implies a 20% change from the current price. Three Wall Street analysts recommend a Hold and two a Sell of shares.
It will take a siren event to spark a buying surge that drives up the share price. Investors face an arduous trudge, watching the new management team structurally address the plethora of customer complaints. (See Analysts’ Top Stocks on TipRanks)
Fraught with Challenges
Critical Sentiment on the Wane
Sentiment among TipRanks’ investors fell 3.5% over the last seven days and 14.5% over the last 30 days. Sentiment ought not to be given short shrift. Investor sentiment trails customer sentiment, which is vital to commercial success.
WISH budget-minded customers’ sentiment is collapsing, too. Revenue was down a harrowing 39% year-over-year. Shipping volume, a reflection of sales, was lower. But the most tenacious problem is the astral plane with customers disappearing.
The company reported in Q2 ’21 the number of active users declined year-over-year to 90 million and 52 million active buyers. Its Q3 ’21 report announced another tumble to 46 million active buyers. Management is warning there will be further slippage in revenue, earnings, and numbers of active buyers.
WISH customer complaints abound. The main ones involve poor customer service, delivery delays and cancellations, product quality and credit card problems. As a personal example, I did not know some items on my order were never being shipped until I tracked down a cryptic message.
The negativity about WISH across the Internet is a rip-current churning, some fear, into an undertow. WISH garners a mere 3.1% of unsolicited positive reviews on SiteJabber. This is as the popularity of e-commerce grows, with 62.5% of consumers reporting they make most of their purchases online. While revenue of $469.3 billion is forecasted for e-commerce in 2021, and $563 billion by 2025, WISH commerce revenue has declined 52% year-over-year.
Insiders Setting a Bad Example
40.8% of WISH shares are owned by insiders. They sold shares worth $13.8M in the last 3 months. The list of sellers includes officers, directors, general counsel, and others, and their actions speak loudly to other investors.
Tickling the Fancy of Risk Takers
For all the negatives, there is a case to be made that WISH is oversold, and the company undervalued…by a lot. It is not yet on the road to doom. WISH has viable products and services, infrastructure, a respected website, and millions of shoppers. WISH is, despite all its problems, the fourth largest among U.S. companies selling goods online.
How many businesses can boast their revenue hit $368 million in three months (Q3)? The Q3 GAAP EPS of -$0.10 beat estimates. WISH annually sells over $2.5 billion in merchandise and services, and its market cap tops $2.8 billion. Moreover, WISH is in the top 35 largest e-commerce companies by market cap. How many companies hold $1.2 billion in cash and equivalents like WISH, and a cash runway 18 months out?
Furthermore, WISH is debt-free. I forecast earnings will rise to drag the company into profitability or close to it within 20-36 months. The adjusted EBITDA reported $30 million loss is less than half the $64 million loss a year before. Additionally, I expect free cash flow to be at breakeven this year. Revenue will grow in double digits, as the company makes its operations more efficient and marketing more effective.
To an extent, WISH suffered from the myopic effects of being labeled a meme stock after going public. The share price jumped 22% in one day, and WISH became the top-hyped stock on Wall Street threads, garnering 3.5 thousand mentions.
Analysts and investors came to think the shares were going to pop like other meme stocks decried by seasoned market makers. Then, the stock had its legs kicked out from under it when the meme euphoria faded. 30% of the shares were being shorted in October, so the stock might pop on any good news or if the meme effect kicks in again.
There are many more valuable e-commerce stocks than WISH. But the potential rewards to investors buying at the bargain basement current share price seems a tantalizing risk.
Disclosure: At the time of publication, Harold Goldmeier holds a long position in WISH the subject of this article
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