- Wix website-building platform attracts high growth.
- Although shares are up 72% since its IPO, I expected further upside.
- Wix proved that its growth is sustainable. Now it's just a matter of time until the company turns profitable.
- Based on my model this is a multi-bagger opportunity in the next 1-2 years.
Wix.com (WIX) is an Israeli company based in Tel Aviv. Many times, I have walked past its headquarters, which are located in the Tel Aviv port district. I heard the name Wix for the first time a couple of years ago, from a friend of mine who was starting a bakery business and had a very good feedback on the Wix platform as he tried to build his site. From then on, I kept hearing from people who were using Wix to build their websites, most of which were for their already existing small businesses. Taking my cue from the legendry investor Peter Lynch (who believes in taking advantage of any information you have about a product/service success long before the Wall St. guys become aware of that success), I waited for a Wix IPO. That IPO came about two years later, on November 6, 2013. Since the IPO, the stock price has risen from $16.30 to $28, a 72% increase. I firmly believe that this increase is just the beginning of a multi-year growth story. I'd like to present you with everything you need to know about Wix's business and the tools to evaluate it. Before we start talking about Wix's business, I'd like to go through the product itself. I think that, as with any business you invest in, it is crucial to understand why the business is growing and what factors you need to gauge to monitor the business growth. To do so, one has to understand the product.
What Is Wix?
Wix is a platform for building websites. Wix focuses on simplicity, meaning that the platform is meant to enable everyone, even people who don't have any experience in building websites or coding, with the tools to build his or her own website. Wix enables you to create a website with a very professional look that is very customizable. You can choose a template from a list of hundreds of website templates, and then you can start tinkering with it as you wish. Editing the template and changing anything on it does not involve any technical knowledge. The whole process is done by a simple drag & drop interface, which, I suspect, even a very unskilled individual, one who uses his or her computer only for random internet browsing, can manage.
Wix enables the user to create a website that looks and functions like a website that a professional website designer made. The fast evolution of the Internet has brought new and complex websites. Today's user expects any website to be friendly, socially integrated, easy to navigate in, and of course, it has to be accessible through a mobile device (smartphone/tablet). Here is a cool visualization that Wix made about the evolution of websites over the past 5-6 years.
Source: Wix's latest IR presentation
Now, all of the features above (search box, contact form, a Google Map, E-Commerce product list) can be chosen from the Wix Editor and then dragged to the desired spot on your website page. To keep things simple and save you from going through the platform yourself, I have posted a couple of screenshots from the Wix Editor.
Let's say I want to add a social bar to my website that will enable visitors to my site to go to my FB page, follow me on Twitter, etc. I go to the "add" menu, and choose "Social Bar."
And then I can just drag the bar to my desired spot. All that is left to do is adding the links to my FB/Twitter/Google+ pages.
As you see, the platform is highly intuitive. You can tinker and change your website with endless functions and widgets. Prior to Wix, you had to go to one of the other options to build your site, a professional designer or a cheap template service. Both of these options are either high cost, or offer limited design control.
You can easily optimize your website for mobile access with an automatic feature, after which you can make any changes you want in the same way you did on the Wix editor. In my opinion, this mobile feature is one of the most important features a small business must incorporate into its website. We all know how annoying it is to try and navigate in a mobile-noncompatible website with our mobile phones. Most users will just give up and leave the website, which could mean lost revenues for a SMB owner.
The Customer Choice
Let's step in the shoes of a potential customer. Let's say we are "Dial-a-Dumpster" (the imaginary company from the template I used above). We are an old-fashioned small business and we understand that we have to own a website to connect with customers. What are our options?
Our first option is the "old way." We would look for a website designer, tell him what website we need, and he would start building it with HTML5. At the end of the day we get a website to which we can make hardly any changes (because we lack coding knowledge), plus we need to maintain it (make ongoing changes as our business changes, e.g., add another service area to the map as our dumpster operation grows). All of that costs us $10K-$20K, which is not a negligible expense for a small business.
Or, we could use the Wix platform. We could enjoy all of the features as with the "old way," but this time we can do it ourselves. The cost would be $100-$140/year, which is substantially lower than the other option. On top of that, we would have full control over our website, and we would be able to make any changes we want, by ourselves.
I believe that the value proposition that the Wix platform offers will bring many potential customers facing the dilemma above to choose Wix as their preferred website-building solution.
Wix is active in the website-building market. According to Netcraft, there were more than 920M websites in the world in February 2014. The number of websites is rapidly growing, and the growth is accelerating.
Source: Netcraft.com. The numbers are in millions and refer to host names; according to Netcraft less than 25% of hostnames are active websites.
While it's tricky to count the number of new sites created in any given year, we do know the number of host names and the number of active sites in any given month, thanks to the Netcraft survey. While the number of host names approaches the 1B mark, the number of active websites was 179.8M in February of 2014. Let's examine the active website numbers:
|Number of Active Websites||10.5||14.9||16.8||21.3||26.3||34.4||50.3||68.2||71.6||83.4||101.8||182.4||186.8||180|
Source: Netcraft web server survey February 2014. Years are 2001, 2002, and so on.
The Wix IR presentation includes the hostname figure as the actual size of the market. As we can't know what is the actual "new website" figure, just the net figure (new websites minus expired domains), we can't actually figure out the market size. We do know that the number of new hostnames was 227M in 2013. If we take 20% as the percentage of active new sites from the new hostnames, we arrive at 45.4M new websites in 2013. At a $120 average annual subscription price, I estimate Wix has a TAM of $6B.
It is important to understand no one actually knows how many new websites went online, but, by being careful we could figure out that the size of Wix's TAM is in the neighborhood of $6B.
Wix created 397,319 websites in 2012; there is no reason to think that Wix has even started to scrape the surface of its potential TAM. Even if we don't know exactly how many new websites are created each year, that number is in the tens of millions, which leaves plenty of room for growth at Wix.
Another staggering figure is that more than half of American SMB owners don't have a website, according to Yodle, while Wix and AMI partners believe that figure to be 75% world-wide. Any way we spin it, Wix's market is huge.
Wix User Base
Wix has been growing its user base rapidly in the past few years. The business model is fairly simple.
Users register to the site, then they can design their own website for free. After which, if they want to publish their website, they can experience a free trial for two weeks. The user can publish the website using his own domain or purchase a domain directly from Wix. Wix actually offers users a free domain for 1 year if the user purchases certain plans. The Wix App Market offers various plug-ins for your website (like shopping carts, forms, etc.). Let's crunch some numbers to analyze Wix's user base.
Source: Wix Prospectus.
As you can see for yourself, Wix has been growing its user base quite rapidly for the past 11 quarters. The company is consistently adding new users. The most important category, Premium User, is actually enjoying accelerated growth.
As of the last quarter, the company had 1.82% of premium users out of its registered user base. The ratio started to climb beginning in Q3-12 when the growth of premium users outpaced the growth of the registered users.
Growth is calculated in comparison to the same quarter figure in the last year.
|New Registered Users||2.6M||3.1M||2.9M||2.6M||2.8M||2.7M||3M||3.7M||3.6M||3.2M|
|New Premium Users||31K||43K||32K||40K||40K||36K||56K||79K||78K||80K|
The number of new users added in comparison to the last quarter.
We get a pretty solid picture. Although the new users of Wix in each quarter varies a bit, the trend is a steady but positive growth rate in respect to the new registered users and a healthy and very high growth rate in respect to the new premium users.
To conclude this section, I believe that Wix's user base will continue to show solid growth. The numbers prove that the platform provides value to the users; more and more users are signing up to a premium plan, and I don't think we need to doubt that this trend will continue.
As a business, all of the above will mean nothing without a strong monetization mechanism. Let's examine the amount of revenue Wix is able to get from each premium subscriber on average.
ARPPU stands for Average Revenues Per Premium User
These numbers are encouraging. In the past 11 quarters, Wix has managed to grow the ARPPU figure by 8%-10% Y/Y. I believe this comes from continuous improvements in the monetization process at Wix, combined with a continuous increase in the value proposition (the Wix App Market, for example).
A good sign for Wix's ability to convert registered users to premium ones is the next slide:
The slide above shows how many of Wix's premium users went active that originated from certain cohorts. In this slide, Wix took the users that registered in the first quarters of 2010 through 2013, and showed how many premium users signed up from that base and when they signed up. We can clearly see that the same pattern applies for the last four years. Even 15 quarters after the Q1-10 registrees' user base was added, premium users were still signing up. This is a sign that the Wix platform offers long-standing value to its users. Another important figure is that 58% of the premium subscriptions (in September 2013) originated from direct and organic traffic. That means that most of the users reach Wix through word-of-mouth, and Wix doesn't heavily rely on aggressive methods of customer acquisition.
The next image shows the exact numbers of the Q1-2010 user cohort taken from the Wix prospectus.
I'll assume that Wix management will continue to put an emphasis on monetization and that ARPPU will keep growing ~9% Y/Y.
When To Expect Profits?
My model suggests that we could see the company reach the breakeven point around Q4-2014. I expect the revenues in the coming years to be as follows:
The EPS figure assumes no further dilution, as the company has started to generate positive cash flows. In 2017, I assume the company will start paying a 20% income tax.
I expect this business to operate with an operating margin of about 30% over the long term. This requires management to manage expenses as the company grows. On an absolute basis, I expect OPEX to keep increasing year over year, but as revenues start to reach substantial levels, OPEX will decrease as a percentage of revenues.
Today, Wix's market cap is $1B. This is 12.5 times my 2013 expected revenues figure. I'll take two approaches in valuing the company over the long term. In 2016, I expect the company to make $3.47 in EPS. The first approach is giving the company a PEG of 1, which will force a P/E of 30 in 2016. According to this approach, the company shares' fair value in 2016 will be $104. This is almost four times today's price level of ~$28. Even if you price in massive dilution-let's take 20%-the shares will be worth $83 or almost three times today's price.
The second approach is looking at the revenue multiple, which is about 12.5 as of today. Even if the market revenue multiple will decrease to 8, when applied to 2016 revenues of $380M, we come up with a market cap of just over $3B, or almost $82/share.
- The company could raise a substantial amount of funds, which will dilute current shareholders.
- My expected timing of profitability depends upon management's ability to control expenses and bring them down as a percentage of revenues.
In conclusion, I think Wix could be one of the shining stars in the coming few years with solid growth, which should propel earnings and make this play a multi-bagger opportunity. I hope you have enjoyed my work and I look forward to your feedback.