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Finance

Should You Buy the Dip in ContextLogic?


ContextLogic Inc. (WISH) in San Francisco is one of the largest e-commerce marketplaces, with more than 100 million monthly active users. The company operates in more than 100 countries through 500,000-plus registered merchants.

The stock has been losing momentum due to the company’s disappointing financial performance and recent analysts’ downgrades, however. Shares of WISH have declined 63.7% in price year-to-date and 28.9% over the past three months.

WISH’s revenues came in at $656 million in the fiscal second quarter, ended June 30, reflecting a 6% decline year-over-year. The company missed the $722.92 million consensus estimate. Furthermore, its net loss increased 909.1% from the same period last year to $111 million. WISH reported negative $67 million in EBITDA over this period, indicating a significant decline from its positive year-ago value. Following the disappointing second-quarter results, five of 11 analysts surveyed by FactSet have downgraded the stock. WISH has declined 33.3% in price since reporting its results on August 12.

Click here to check out our E-commerce Industry Report for 2021

Here’s what could shape WISH’s performance in the near term:

Market Expansion

WISH has been partnering with several companies over the past few months to expand its market reach. On June 14, the company entered a two-year partnership with the e-commerce platform PrestaShop. Under the agreement, PrestaShop’s 300,00 merchants can sell their products on the Wish marketplace. This should expand the product offerings on the WISH platform, making it more attractive to consumers worldwide.

On July 6, WISH received a Payment Services License from the Dutch Central Bank in the Netherlands. This marks WISH’s first step toward becoming a payment services provider in the Netherlands and Europe. The company should be able to achieve significant cost savings through this license. Also, the license paves the way for WISH to explore growth opportunities in the payment services space.

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In April, WISH formed a  strategic partnership with the South Africa Post Office to improve its logistics and customer experience in the country. This partnership should strengthen WISH’s foothold in South Africa and accelerate its user base growth in the region.

Lawsuits

Several law firms are currently investigating whether WISH’s board of directors violated the Securities Act of 1933 or breached other fiduciary duties during its initial public offering last December. In addition, multiple class-action lawsuits have also been filed against the company in this regard.

The class-action lawsuits also allege that the company made several materially false and misleading statements regarding its operational strength and financial prospects and overstated its monthly active users’ growth trends.

Mixed Growth Outlook

Analysts expect WISH’s EPS to rise 89.3% in the current year, 49.2% next year, and at a rate of 53.9% per annum over the next five years. However, the company’s EPS is expected to remain negative until at least next year. In addition, WISH has missed consensus estimates in each of the past three quarters since it became a publicly traded company.

The $2.51 billion consensus revenue estimate for its fiscal year 2021 indicates a 1.2% decline year-over-year. However, the Street expects WISH’s revenues to improve 7.6% from the same period last year to $2.70 billion in its fiscal year 2022.

Consensus Rating and Price Target Indicate Potential Upside

Of the 10 Wall Street analysts that rated the stock, two rated it Buy, six rated it Hold, and two rated it Sell. The $9.81 12-month median price target indicates a 48% potential upside from Friday’s $6.63 closing price. The price targets range from a low of $5.00 to a high of $19.00.

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POWR Ratings Reflect Neutral Prospects

WISH has an overall C rating, which equates to Neutral in our proprietary POWR Ratings system. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.

WISH has a C grade  for Quality. Its 57.92%  trailing-12-month gross profit margin is significantly higher than the 35.07% industry average. However, the company’s net income margin and ROA are negative 32.07% and 51.8%, respectively, justifying the Quality grade.

The stock also has a C grade for value. Its 1.16 forward EV/Sales ratio  is 21.2% lower than the 1.47 industry average. Nonetheless, the stock’s 5.59 forward Price/Book multiple is 55.2% higher than the 3.60 industry average. Thus, WISH’s mixed valuation metrics are consistent with its Value grade.

Of the 73 stocks in the Internet industry, WISH is ranked #45.

In addition to the grades we’ve highlighted, we have rated WISH for Growth, Momentum, Sentiment, and Stability. Get all WISH ratings here.

Bottom Line

As a burgeoning company in the e-commerce space, WISH has tremendous growth potential. However, the company’s operational inefficiencies have resulted in substantial losses, higher than analysts’ estimates, in the latest quarter. The company has been reducing its digital advertising spending to reduce its losses. However, WISH expects its third-quarter revenues to decline year-over-year, while its EBITDA is expected to be in the range of negative $65-$70 million.

Thus, we think investors should wait until the company restructures its operations to improve its profit margins before investing in the stock.

How Does ContextLogic (WISH) Stack Up Against its Peers?

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While WISH has an overall C (Neutral) in our proprietary rating system, one  might want to consider its industry peers Travelzoo (TZOO) and Yelp Inc. (YELP), which both have an A (Strong Buy) rating.

Click here to check out our E-commerce Industry Report for 2021


WISH shares were trading at $6.75 per share on Monday afternoon, up $0.12 (+1.81%). Year-to-date, WISH has declined -62.99%, versus a 20.56% rise in the benchmark S&P 500 index during the same period.

About the Author: Aditi Ganguly

Aditi is an experienced content developer and financial writer who is passionate about helping investors understand the do’s and don’ts of investing. She has a keen interest in the stock market and has a fundamental approach when analyzing equities. More…

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