A Forensic Analysis Of Wix.com, A Technology Unicorn With 50-60% Downside Risk

Apr. 19, 2017 1:00 PM ETWix.com Ltd. (WIX)EIGI, GDDY, WEB, ADBE40 Comments
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Ben Axler


  • WIX's freemium website model becoming more competitive, user acquisition costs exploding with registered users slowing. Its recent DeviantArt acquisition is a warning sign of slower growth ahead.
  • WIX's gross margins are astronomical, and its capex is minimal. It's a rare unicorn that deserves scrutiny. Our forensic analysis has identified numerous potential warning signs.
  • Investors haven't carefully scrutinized WIX's share count guidance. We estimate 2.2-3.3m shares to be issued, no surprise given the 3x increase in share price over the LTM period.
  • A close look into the CFO's background and auditor shows a troubling pattern of association with companies plagued by accounting issues and fraud allegations.
  • WIX trading near avg. analyst price targets and at 9.5x and 178x 2017E sales and EBITDA. Shares are priced for perfection, insiders are selling, and we see 50-60% long-term downside.

Report Entitled "In The Land Near TROI, A Trojan Unicorn"

Spruce Point Capital Management is pleased to announce it has released the contents of a unique short idea involving WIX.com Ltd. ((NASDAQ:WIX) or "the Company"), an Israeli website and content development company. With its share price up approximately 300% in the past year, we have conducted an extensive fundamental and forensic accounting review, and believe investors are overlooking significant downside risks and dilution. As a result, we have a "Strong Sell" opinion and a price target of approximately $36-42 per share, or approximately 50-60% downside. We present a detailed short thesis. Please review our disclaimer at the bottom of this email.

Executive Summary

  • While WIX was an early mover in the freemium website creation model, it is now becoming more competitive with new players, and its "growth at all cost" strategy through expensive advertising is appearing to plateau. WIX defines its own unique concept: Time Return on Investment (TROI) or dollars collected from new subs in period to dollars spent on marketing costs. Its customer acquisition costs are rising rapidly as its size of ~100 million "registered users" creates a barrier for additional growth. As a result, we believe its recent deal to acquire DeviantArt represents a potential strategy shift to grow through acquisitions and introduces new risks to its business model that investors should carefully consider. We think WIX's business is set to slow, and investors should look carefully to see that its revenue growth in 2017 will outpace cash collections growth.
  • WIX's "unicorn" model appears too good to be true, and there are emerging cracks beginning to appear in its financial statements, including subtle revenue and tax restatements and anomalies in its cost structure. WIX's portrays itself as a well-oiled machine with world-record gross margins at 85% and that it will have spent ~$30 million on capex from 2010 to 2017 to accumulate >100m registered users, engineer a negative churn business that produces $400 million of revenues, $1.4 billion of collections, and is worthy of a $4 billion market cap. Based on our analysis, these results merit scrutiny (e.g. try finding another negative churn business or capex efficient model). The SEC recently issued comment letters to WIX questioning its aggressive Adj. EBITDA presentation and its pace of revenue recognition and expense deferral. After two EBITDA revisions already, investors should be suspicious, but we believe more revisions may come. WIX is dropping subtle hints in its 20-F that because it is no longer an "emerging growth company" under Section 404 of Sarbanes-Oxley, it will face stricter financial control.
  • WIX insiders have incentives to heavily promote its shares and left clues to suggest it intends to dilute with 2-3 million new shares. We estimate its two founders are sitting on $225 million of option gains needing to be monetized. Options under the 2013 plan start becoming fully vested in 2017. Early venture backers (Benchmark, Insight, Bessemer) have exited, and only one initial backer remains. None of WIX's top shareholders are Israeli funds. WIX has lured in retail investors and US funds through repeated Cramer Mad Money episodes. Now that WIX Is claiming it has reached a cash flow positive inflection point and has ample cash on the balance sheet, we find evidence of pending dilution.
  • Investors should be highly concerned by WIX's audit situation: Two of WIX's audit committee members have already resigned since coming public (both were non-Israeli based members). The Company's two local Israeli auditors have a spotty track record of early identification of accounting issues, and both have been cited by the PCAOB for audit deficiencies. WIX's annual audit fees of just $500k are miniscule in relation to other SaaS and marketing service technology companies.
  • Background of WIX's CFO Littered With Associations To Questionable Companies: WIX's CFO has worked at three US listed public companies: Alvarion, Veraz Networks, and ECI Telecom. Alvarion and ECI Telecom faced fraud allegations, and Veraz was sanctioned by the SEC for FCPA violations. Alvarion and Veraz (later merged with Dialogic) drifted to insolvency and delisting.
  • Valuation Concerns Becoming Evident: WIX's valuation is stretched for a subpar "SaaS" company with high churn, no pricing power, low barriers to entry, short customer contracts, and low customer switching costs. The avg. analyst price target is ~$72 (implying limited upside to the current price), and analysts don't correctly account for its significant dilutive share count. At 9.5x and 178x 2017E sales and Adj EBITDA, WIX is priced for perfection. Investors ascribe a value of $1,600 per paying sub. vs. $400-500 for peers. With average annual revenue per sub at ~$137/year, the current valuation represents ~12 years of subscriber sales. WIX could lose 20% just on the share count correction, we could see 50-60% downside risk

Meteoric Share Price Move Deserves Scrutiny

The Market Is Incorrectly Valuing WIX On The Wrong Share Count

Read the fine print. For the first time, WIX is giving fully diluted share count guidance, and it's not pretty. Buyer beware! The Company has forecasted a ~37% increase in diluted share count.

Source: WIX Shareholder Update February 2017

  • Something isn't adding up to Spruce Point.
  • WIX's substantial diluted share count estimate for 2017 of 57 million to 58 million shares, or a +37% increase.
  • We attempted to bridge the gap by considering WIX's outstanding options and Restricted Stock Units.
  • We estimate that WIX may issue 2.3 million to 3.3 million shares this year to dilute investors. With its stock price up approx. 60% YTD and trading at all-time high multiples, investors should not be surprised.
  • WIX is guiding to $63-65 million of Free Cash Flow in 2017 and has $171 million of cash and equivalents, so it should not need to raise additional capital, absent plans for a large acquisition. (6)

  • Supporting our view that WIX's cash flow may not be sustainable and it may need to dilute shareholders, we observe that its recent investor presentation could not offer long-term cash flow guidance.
  • This is at odds with WIX promotion of itself as a SaaS company with world-class gross margins, negative churn, limited capex requirements, and highly predictable cohort visibility.

Source: WIX Investor Presentation, February-March 2017

  • It's easy to justify a quick 20% downside in price just on using the correct share count.
  • To illustrate, analysts such as Needham have a $73 price target and say the following:

"Our price target of $73 is based on a 5.8x 2018E EV/Sales multiple, in-line with other top performing SaaS companies, which we believe is appropriate given its faster revenue growth rate."

Consider the following math:

  • WIX is currently trading at approximately 7.3x EV/2018E sales based on the actually fully diluted share count of 57.5 million for this year, according to WIX.
  • At $57/share and $135 million of net cash and equivalents, WIX's EV would currently be $3.1 billion.
  • Needham estimates $535 million of 2018 sales.
  • This equates to a 5.8x 2018E EV/Sales multiple in-line with peers, according to Needham.
  • At $57/share, that's approximately 20% downside from the current price of $71/share.
  • This analysis assumes nothing else other than diluted shares directly from management and a fair multiple directly from its broker.
  • Where are we wrong?

Fundamental Strains In WIX's Business Model

There are limited barriers to entry in WIX's business, and many new competitors have entered offering a similar proposition of a free website, with the hope of upselling registered users.

Adobe (ADBE) is a formidable competitor that is moving into WIX's space catering to small businesses looking to build an online e-commerce presence. Adobe is also now building an Artificial Intelligence tool to automate web design. This should worry WIX, which recently released a similar ADI feature last year.


Adobe Business Catalyst








IM Creator















New "AI" Sites >>>




Other competitors such as TRAIBL take direct aim at WIX through targeted search advertising:

WIX has a deep pool of competitors, including newer ones that have recently seized more market share faster than WIX has been able to achieve since 2013. WIX has spent almost $500 million in sales and marketing and has just 0.7% market share of content management systems. The bulls would say this data shows WIX is growing market share, but we say it is fractional share gains, and others have achieved more share faster.

Market Share Estimates

Source: W3Techs Survey; Note: New entrants with faster growth bolded

WIX's Problem: Acquisition Costs Exploding, Growth Rate Slowing, Discounts Rising

  • WIX's business model of "Spend at any cost to acquire users" is showing signs of hitting a wall. The cost to acquire an incremental user is exploding. It needs new users to drive premium subscribers. Both New Registered Users and New Premium Subscriber growth rates are slowing as its size gets larger.
  • Declining Average Revenue Per User (ARPU): In addition to escalating user acquisition cost, WIX's ARPU has been stagnant from 2014 at $140 to $136 in 2015 and $137 in 2016. Management's explanation is that it has been selling more annual subscriptions at a discounted price - 20% off according to the CEO on the Q3'15 conference call. However, now on its website, under the questions "What are the benefits of purchasing a Yearly Savings Plan", it is advertising "savings up to 45%".

WIX Affiliate Program

WIX does not discuss much about its "Affiliate" program other than a one-sentence disclosure in its 20-F Annual Report. Using the Wayback Machine, we find that the Company has boosted its payout by 25% since 2015, which further supports our belief that WIX's customer acquisition costs are rising.

Is WIX Screwing Its Affiliates To Reduce Expenses And Boost Cash Flow?

  • That's the claim by an anonymous poster who provides reasonably good detail of current employees cited in the post that can be independently verified to be working at WIX. The timing of the change coincides with the payment change noted below:
  • "One day, in middle of last year (2015), I received an email from Wix telling me that they will be changing their affiliate terms so they will be stopping any payment related to previous agreements by August 2015."

WIX Affiliate Program - June 2015

WIX Current Affiliate Program

WIX Problem: Complaints Rising...

According to WIX, support and call center employees fell by seven people in 2016, while registered users and paying subscribers increased by 20 million and 697,000. This is a recipe for disaster. WIX's CEO credits user satisfaction to its recent success, but the recent explosion of customer complaints suggests otherwise…

CEO Abrahami (11/14/15):

"I just want to add to what Nir said. It's not just about increasing the value of the cohorts in the lifetime value, it's just about user satisfaction." and "And I think that the overall effect of having more and more segments being addressed by us is going to create a major change in the overall conversion and of course, user satisfaction because they get a better product, we can do a lot more on Wix."

Effect: Rise of Numerous Customer Complaints. Below is a sample

Horrendous Service (4/6/17):

"Their customer service is the bottom of the barrel and they purposefully make it difficult for you to contact them if you have a billing or technical issue."

BBB Product/Service Complaint (4/6/17):

"The problem is they don't have customer service at all You have to type in your question and they keep sending you to there same standard answers If you call to request a ticket mind you for a call back, that doesn't happen either How can you have a website if you can't get online ordering to function I paid them in full $239.00 on February 23, and it's now April 4, and still don't have a working website I want them to fix the problem or I want my domain name and a full refund"

Short of a Scam Really (3/28/17):

"terrible customer support - links that circle back, no real support and a fake phone number that sends you back to the same link... crazy... call back service is shut down until further notice, no way to submit support ticket.... are they going under, or just scamming people"

Terrible customer service (3/15/17):

"I was not able to get my site up, so I requested a call back from customer service. I wait TWO hours for the call. This is after my first call to WIX when I was on hold for 45 minutes before I hung up."

WIX Solution: Announce a Speculative Acquisition

  • Spruce Point has always warned about carefully examining acquisitions to assess whether they are being used to divert investor attention from underlying issues.
  • WIX announced the acquisition of DeviantArt on February 23, 2017. WIX acquired its 40 million registered members at an enterprise value of $39 million or approximately $1.0/member. Although net of member overlap this figure is likely higher, but likely substantially lower than the $7.67/WIX user current acquisition cost.
  • At pricing of ~$55/year per member and $9.6 million of annual sales, we estimate it had 174k paying members or just 0.4% of total registered members. With such low penetration and willingness to spend, WIX will be challenged to mine its member base.
  • WIX's penetration of its paying premium customers to registered users is 2.5% - this underscores the relative difficulty DeviantArt had in converting members, and it was founded in the year 2000; plenty of time for management to figure it out, or another acquirer to come before WIX to "unlock" value.

WIX Incentive To Pump Up Results In 2017: Options

We note that WIX's 2013 Employee Share Incentive Plan is to come fully vested in 2017. Per the language below:

"Options granted under the 2013 plan will generally vest over four years commencing on the date of grant such that 25% vest on the first anniversary of the date of grant and an additional 6.25% vest at the end of each subsequent three-month period thereafter for 36 months" - Source 20-F

It is evident that the two WIX founders are sitting on large option gains and may need to monetize them soon.

Signs of a Model Too Good To Be True

Register User Warning

  • WIX promotes registered users, and defines it in such a way as to make it almost meaningless to evaluate its business. All that's needed is a unique email address and nothing more. There's no requirement that a registered user do a single thing such as maintain active use of the account over any specified period.
  • In fact, WIX has even said it has no way of even assessing the level of engagement of a registered user.
  • This is baffling given WIX's substantial R&D expenditures from 2010 to 2016 totaled in excess of $300 million, and it launched a nifty "artificial intelligence" tool for website design, but hasn't solved the puzzle of tracking users.

From WIX's 20-F

"We use the definition "user" to mean the number of unique email addresses registered on Wix.com. The number of users as we define it may be higher than the actual number of users because some users have multiple registrations and others may have registered under different or fictitious names. In addition, we have no means of assessing the level of engagement of a particular user following registration. The length of time that users take following registration to design and publish a website varies significantly from hours to years. Some users may never publish a website, but have not cancelled their registration. Even if it were measurable, we do not consider the level of engagement of our registered users to be material to our business"

World Class Gross Margin: Too Good To Be True?

WIX's gross margin rivals world class cloud company Adobe and more established cloud technology companies. However, WIX provides very little disclosure about drivers of its cost of revenues.

WIX's Cost of Revenues Description Is Terse:

"Cost of revenues consists primarily of costs directly associated with the provision of services, namely, bandwidth and hosting costs for our platform, customer support software solutions and related call center costs along with domain name registration costs. Cost of revenues also consists of personnel and the related overhead costs, including share-based compensation." - Source: 20-F, p.58

Closer Look At Cost Drivers

By analyzing the drivers of annual cost of revenue increases carefully, we have some cautionary observations:

  1. Why did WIX's bandwidth and hosting costs growth rate decline in 2015 and surge in 2016?
  2. Why are the 400 servers disclosed by WIX now falling, after having increased steadily by 100 each year and rapid user growth?
  3. Why did domain registration cost increase not keep pace in 2016, and why have incremental registration cost margins increased over time? Has WIX been deferring costs early to boost margins? GoDaddy and Tucows report 71% and 76% cost margins, respectively. Why is WIX lower? (1)
  4. Why did WIX stop disclosing headcount related to cost of revenues in 2016?
  5. When measuring incremental bandwidth and hosting costs per added register user costs are going up. Is this diseconomies of scale? (2)

  1. Recall, the SEC comment letter referenced cost deferrals with the company claiming that "95% or more of our expenses have historically been incurred when billed or within 30 days thereof".
  2. WIX has claimed gross margins increase due leveraging third-party providers to effectively manage its hosting costs and scale benefits (source).
  3. Defined as annual increase in bandwidth and hosting costs divided by annual increase in registered users.

WIX's Capex Too Good To Be True?

  • WIX is possibly the most capital efficient business in the history of technology, or simply a business model that is way too good to be true? From 2010-2017E, WIX will have spent just $30 million in capex to create a business with >100 million registered users, $1.2 billion and $1.4 billion of cumulative collections and revenues, respectively.
  • We've looked carefully at gross capital investment per employee of WIX vs. selected peers.
  • We find, on average, peers have invested $55,000 per employee.
  • At the moment, WIX is running at approximately $7,000 per employee.
  • This begs the question: Why haven't other businesses figured out and copied WIX's success and rush to come public to get WIX's valuation?

WIX's Zero (Now: Negative Churn) Too Good To Be True?

  • WIX has historically claimed zero churn, and now says it has negative churn, an extremely rare situation among SaaS companies; in fact, we are hard-pressed to find any other public companies making this claim.
  • Be cautioned that WIX does not back any of its claims with churn calculations in its SEC filings, so it is very much a "trust us" story. WIX tracks churn (as illustrated by the job posting below).
  • Financial reporting practices are supposed to give investors a view of the business through the eyes of management. What is management seeing that investors are not?

WIX Investor Presentation, March 2017

WIX Job, March 2017

Q. Tim Klasell: "Yes. Sort of jumping back on the new Editor, I know that's helping to drive conversion up. But how about on retention? Have you noticed any change on retention with users of the new Editor?"

A. COO Zohar: "Well, yes. So first of all, yes. The new Editor, which is a lot of the new functionality there and help a lot more people complete Web sites that they're very proud of. And when they do that, of course, they're less likely to churn. I just want to address the fact, again, our actual churn, historically, is practically zero. We do see some small sign that it actually might go above that, meaning we're going to get negative churn. But we'll have to wait and see more about that and we'll update you guys as you know."

Source: Q1'2016 Earnings Conf. Call (5/1/16)

Clues About WIX's Real Churn

  • According to JPMorgan research, a firm that has a "Neutral" rating and a below market price target of $67/share, the biggest risk to WIX's rating is its monthly churn of ~2% and ~4% for users and subscriptions, respectively.
  • Annualizing these figures suggest 24% and 48% churn, respectively. Also, WIX has historically given Q1'2010 cohort data in each of its 20-F reports. It says it continues to generate new premium subscriptions, and also reports the active premium subscribers from this cohort. Based on our analysis, the percentage of active to total new subscribers continues to fall. Buyer beware!

Cohort Analysis: First Sign of Restatement

  • WIX hypes the fact that its cohorts are able to generate residual revenues.
  • Spruce Point has warned about over-dependence on these types of analyses. To illustrate, Bazaarvoice (BV] hyped its cohort analysis at IPO. We recommended a short position in BV, and its share price has subsequently declined by 75%. As it relates to WIX, we observe that it recently made a slight restatement of active premium subscribers from its initial cohort lower. Buyer beware!
  • Recent investor enthusiasm has been around the uptake of new cohorts, but it remains to be seen if they can stick in the face of less customer service and support personnel, and evidence suggesting increasing complaints. If history is any guide, WIX will experience a decline in subscriptions from these cohorts over time. We also believe current cohorts are at risk of churn due to higher discount incentives offered upfront, which would increase the cost for the subscriber to continue

Source: WIX 2016 20-F Annual Report, filed April 2016 and WIX Investor Presentation

Collection Issues: Why Is Revenue Diverging From Collections Growth?

Investors are cautioned to observe the recent divergence of sales growth vs. collections growth forecasted in 2017. When asked, the CFO's explanation seemed murky and difficult to validate. He claims collections accelerated with no explanation why. We've analyzed the annual growth rates for both variables and find that they historically track each other within a couple percent. We also checked his assertion that collections growth was accelerated in 2H16, yet we don't find evidence that collections growth outpaced sales. Our key takeaway: WIX's business is slowing

JPM Analyst Auty Q4'16 Conference Call (2/12/17):

"Looking at the guidance for 2017, can you walk us through why the collections growth and the revenue growth are - have diverged to this extent?"

CFO Shemesh:

"With regard to the revenue, as we know that the revenue takes time until catch up with collection, usually 6 to 12 months obviously because of revenue. The second half of 2016 we accelerated the growth in term of collection, so we actually saw a much better growth more than 40% during the second half of 2016. So I think that when you look at revenue, it basically represents the growth of collection that we've seen in the previous year. So obviously if on 2016 the overall collection growth was 42% so you should explain the revenue to catch up with that. And to represent the same growth that we've seen in collection over the previous year. So that basically kind of explained to you why the growth in revenue actually accelerated and it's more than the growth of collection that we guided for 2017."

Our Analysis Suggests Collections Do Not Lag Revenues:

Source: WIX financial statements. 2017E updated guidance for the DeviantArt acquisition

Warning: Guidance Becoming Less Transparent

Spruce Point finds it hard to believe that:

  1. WIX does not provide guidance of registered users or premium subscribers (a critical driver of its financial model),
  2. WIX's financial guidance is so narrow and precise to be within just a few million dollars, and
  3. That WIX's guidance is becoming less transparent.

Warning: Very Little Long-Term Deferred Revenues

WIX's deferred revenue accounts merit scrutiny. The Company reports almost no long-term deferred revenue. This is surprising given the nature of its business and recent new Risk Factor disclosure that it has multi-year contracts with customers. WIX also sells longer term domain registrations. Compare WIX's deferred revenue composition vs. peers below and you'll understand our concern.

From the new 20-F Risk Factor addition underlined:

A decrease in annual subscriptions or renewal rates of our existing premium subscriptions could adversely impact our collections and revenues, result in delayed or lower than forecasted profitability, and harm our ability to forecast our business.

The rate at which premium subscriptions are purchased and the rate at which premium subscriptions are renewed, significantly impact the overall number of premium subscriptions and, as a result, our collections and our revenues. As of December 31, 2016, one-year, two-year and three-year subscription packages constituted approximately 83% of all premium subscriptions.

(Source: 2016 p. 7 vs. 2015 p. 8)

Warning: First Sign of Revenue Restatement

WIX restated its App Market revenues lower recently. It's hard to trust management's claims that ARPU is rising from more App Market sales when it cannot accurately calculate App Market sales!

CFO on Q3'15 Earnings Call (11/4/15):

"Our average revenue per subscription is also up year-over-year, excluding the impact of currency and the mix shift to more annual plans that has taken place over the last year. The increase in ARPU is being driven by increased sales of apps in our App Market, vertical apps and other revenue sources such as domains and images."

From the Recent 2016 Annual Report:

"We launched our App Market in the last quarter of 2012 and therefore generated negligible revenues from it in 2013 and 2014 and generated revenues of $2.8 million and $5.9 million in 2015 and 2016, respectively." Source: WIX 2016 20-F, p.50

From the Prior 2015 Annual Report:

"We launched our App Market in the last quarter of 2012 and therefore generated negligible revenues from it in 2013 and 2014 and generated revenues of $3.8 million in 2015" Source: WIX 2015 20-F, p.51

Warning: History of Aggressive EBITDA Presentation

WIX already made the aggressive move to bolster EBITDA in 2014 by adding back changes in deferred revenues.

  • WIX's Adjusted EBITDA has come under scrutiny from the SEC from a comment letter in February 2016 related to changes in deferred revenues. The Company is now abandoning its EBITDA presentation practices according to a statement on its last earnings conference call a year later in February 2017.
  • However, notice that the SEC also called out accelerated revenue recognition while delaying expenses. When will WIX provide greater clarity and/or make changes?

SEC Comment:

"In addition, your disclosures do not comply with Item 10(e)((I))((C)) of Regulation S-K because you do not explain to investors how they should compensate for the mixed attributes of your measure. For example, revenues are accelerated to when billed, but other line items such as expenses are not."

Warning: Read The Fine Print Disclosure In The New 20-F of Revenue Accounting Changes

WIX has warned that FASB issues ASU 2014-09 guidance on revenue from contracts with customers. There's a lengthy discussion in the notes of the 20-F. While it is too early to determine the impact, WIX has made some disclosures that bear closer consideration. What exactly about creating a website at WIX involves "Variable consideration and significant financing"

The Company says the following:

"The Company is in the process of reviewing its current accounting policies and practices to identify potential differences that would result from applying the requirements of the guidance to its revenue contracts.

With the assessment in its progress, the Company identified the following areas that may be affected:

  1. Estimations of the transaction price due to variable consideration and significant financing component.
  2. Assessment of when control of certain promised performance obligations, aside from the Company's premium subscriptions, are transferred to the customer.

In addition, the Company is in the process of identifying appropriate changes to its business processes, systems and controls to support recognition and disclosure under the new guidance."

Question Marks Around Management, Governance, and Audit Integrity

Pay careful attention to WIX's CFO. He's been associated with not 1, 2, but 3 controversial companies.

CFO Lior Shemesh Background:

  • Prior to joining Wix in March 2013, worked at Alvarion Ltd. (VP of Finance/CFO) 2008-2013.
  • Prior to Alvarion, he was VP of Finance at Veraz Networks 2003-2008 (merged with Dialogic which was delisted from Nasdaq to the bulletin board and sold for pennies).
  • Prior to Alvarion, Financial Controller of ECI Telecom.

What happened:

  • Alvarion was public on Nasdaq and went into receivership and liquidation and eventually delisted.
  • Allegations of fraud from the former financial controller at Alvarion prior to Shemesh joining.
  • Veraz Networks charged by the SEC with FCPA violations in 2007-2008 period.
  • ECI Telecom faced a serious shareholder lawsuit claiming it hyped its technology and engaged in a reckless scheme with improper sales and revenue recognition policies in violation of GAAP. ECI reached a settlement without admitting guilt.

WIX's Auditor Also Merits Scrutiny

WIX has both an internal and external auditor. WIX uses the same auditor external auditor used by Caesarstone (CSTE). We warned our readers early on about its auditor's citations. In alignment with Spruce Point expectations, CSTE has started restating its results. Will WIX be any different?

WIX's audit fees are significantly lower than tech SaaS companies such as The Ultimate Software ULTI (which we previously wrote about), Workday (WDAY), GoDaddy (GDDY), Web.com (WEB), Cornerstone (CSOD), and others.

Two of WIX's Audit Committee members have already resigned, most recently Norbert Becker, effective April 2017 and Betsy Atkins in July 2014. Both resignations were of non-Israeli based directors.

Insiders Are Selling:

  • Key venture partners (Bessemer, Benchmark, and Insight) have completely exited. Insider ownership is now down from 39.4% to 19.6% (-20%). Do they know something we don't?
  • WIX is increasingly owned by US investors, and no major Israeli institutions.

We Insiders Have Reaped $42 Million

Valuation and Price Target

  • Analysts have a resounding "Buy" or "Overweight" recommendation on WIX and have an average price target of $71.60 per share, leaving little upside from the current price.
  • WIX's shares are already up almost 60% YTD and, for a period, were trading above the average analyst price target. This doesn't appear to be a good entry point for owning WIX.
  • Even Cantor Fitzgerald downgraded recently from Buy to Neutral (ironically also upping the price target from $65 to $80… hmm)

Promoter View vs. Spruce Point View

Needham (Buy $73: March 2017):

"We are encouraged by Wix's acquisition of DeviantArt (DA). We believe the acquisition provides Wix with exclusive access to DA's 40M registered users and 45M monthly unique visitors. With Wix's improving conversion rates, we believe these users could boost its premium subscribers, collections, and revenue."

Spruce Point response:

  • We estimate DeviantArt does $9.6 million of revenues. Paying ~$55/yr per member, that equates to 174k of paying subscribers, which is just 0.4% of its registered users. Compare this with WIX's penetration ratio of 2.5% and it's easy to see that DeviantArt's customers are tougher to convert to paying.

JPMorgan (Neutral: $70, March 2017)

"No one was questioning whether things are good for Wix or not because it is clear things are going really well."

"While WordPress, the largest website building platform prior to Wix, tapped out at about 100M users, if we look at popular social media platforms such as Facebook, we see user accounts approaching 1B or more. So perhaps the registered user population addressable market is somewhere in between the 100M WordPress users and a billion users for the most popular social media platform"

Spruce Point response:

  • Perhaps things should be questioned given the abrupt change in financial performance, extreme appreciation in share price, and our forensic research, which indicates financial and accounting deviations and restatements.
  • We think it is becoming clear that WIX is also experiencing growth challenges at the 100 million user level, and its strategy shift to acquire DeviantArt is a strong symptom of the problem.
  • Comparing WIX with a social media platform such as Facebook (FB) is a nice stretch by an analyst to justify continued buying of shares.

Stephens (Buy: $50, August 2016)

"WIX's business model is "SaaS"-ier than ever. In our opinion, WIX has more of a SaaS business model and should be lumped in that peer group rather than its historical peer group. More than 80% of WIX's subscriptions are annual, which provides the same visibility and predictability of many SaaS companies"

Spruce Point response:

  • WIX's SaaS business is an outlier that deserves major scrutiny. Its gross margins are astronomically higher than peers, its capex significantly lower, and its absence of more long-term deferred revenue in the face of more annual subscriptions should be considered a red flag.

WIX Is a Jim Cramer Mad Money Favorite

  • We cautioned earlier that WIX has no Israeli asset or fund managers among its top holders.
  • Instead, WIX appears focused on the retail investor market.
  • WIX's CEO has made three appearances, which investors are encouraged to watch and form their own opinions.
  • CNBC Mad Money: November 17, 2016.

  • CNBC Mad Money: May 19, 2015.

  • CNBC Mad Money: June 8, 2016.

WIX Trades At An Unjustified Premium To Its Peers

  • WIX's overvaluation is easy to observe from its current relative valuation to peers GoDaddy, Web.com, Endurance International (EIGI), and United Internet (OTCPK:UDIRF). The Bulls would explain the valuation by saying that WIX's revenue and EPS growth rate vastly exceed its peers. Our rebuttal is that WIX is a lower quality SaaS company with high customer churn and many short duration customers.

  • The most shocking valuation data point is that WIX trades at $1,600 per subscriber. The average revenue per subscriber (ARPU) is $137/year; this implies investors are paying ~12 years of revenues at current valuation.

  • The peers trade at closer to $500 per subscriber with higher ARPUs. The Street also fails to: 1) Capture WIX's true diluted share count and 2) Use the new EBITDA (ex: change in deferred revenues)

WIX Trading At Peak Valuation

WIX's valuation is trading at peak levels while ignoring the following signs:

  1. Rising customer acquisition costs
  2. Declining customer growth rates
  3. Acquisition integration risks
  4. Financial presentation discrepancies
  5. Risk of material weaknesses in accounting
  6. Shareholder rotation by early investors
  7. Overhang of large potential share issuance

Spruce Point Estimate 50-60% Downside Potential

Spruce Point Capital Management

Spruce Point Capital Management, LLC is a New York-based investment manager founded in 2009. The firm focuses on short-selling and special situations opportunities. The firm conducts in depth forensic fundamental research and takes an activist approach to investing. Our research challenges conventional thinking with deep fundamental analysis, analytical rigor, and conclusions rooted with our unique viewpoints. For more information visit our website and follow us on Twitter @Sprucepointcap.


This research expresses our investment opinions, which we have based upon interpretation of certain facts and observations, all of which are based upon publicly available information, and all of which are set out in our complete research presentation report on our website. Any investment involves substantial risks, including complete loss of capital. Any forecasts or estimates are for illustrative purpose only and should not be taken as limitations of the maximum possible loss or gain. Any information contained herein may include forward looking statements, expectations, pro forma analyses, estimates, and projections. You should assume these types of statements, expectations, pro forma analyses, estimates, and projections may turn out to be incorrect for reasons beyond Spruce Point Capital Management LLC's control. This is not investment or accounting advice nor should it be construed as such. Use of Spruce Point Capital Management LLC's research is at your own risk. Any historical performance achieved from any idea or opinion from Spruce Point Capital Management should not be considered an indicator of future performance. You should do your own research and due diligence before making any investment decision with respect to any of the securities covered herein. Spruce Point Capital Management, subscribers and/or consultants shall have no obligation to inform any investor or viewer of this report about their historical, current, and future trading activities.

You should assume that as of the publication date of any presentation, report or letter, Spruce Point Capital Management LLC (possibly along with or through our members, partners, affiliates, employees, and/or consultants) along with our subscribers and clients has a short position in all stocks (and are long/short combinations of puts and call options of the stock) covered herein, including without limitation WIX.com Ltd. ("WIX" or "the Company"), and therefore stand to realize significant gains in the event that the price of its stock declines. Following publication of any presentation, report or letter, we intend to continue transacting in the securities covered therein, and we may be long, short, or neutral at any time hereafter regardless of our initial recommendation.

This is not an offer to sell or a solicitation of an offer to buy any security, nor shall any security be offered or sold to any person, in any jurisdiction in which such offer would be unlawful under the securities laws of such jurisdiction. Spruce Point Capital Management LLC is not registered as an investment advisor, broker/dealer, or accounting firm.

To the best of our ability and belief, as of the date hereof, all information contained herein is accurate and reliable and does not omit to state material facts necessary to make the statements herein not misleading, and all information has been obtained from public sources we believe to be accurate and reliable, and who are not insiders or connected persons of the stock covered herein or who may otherwise owe any fiduciary duty or duty of confidentiality to the issuer, or to any other person or entity that was breached by the transmission of information to Spruce Point Capital Management LLC. However, Spruce Point Capital Management LLC recognizes that there may be non-public information in the possession of WIX or other insiders of WIX that has not been publicly disclosed by WIX. Therefore, such information contained herein is presented "as is," without warranty of any kind - whether express or implied. Spruce Point Capital Management LLC makes no other representations, express or implied, as to the accuracy, timeliness, or completeness of any such information or with regard to the results to be obtained from its use. All rights reserved. This document may not be reproduced or disseminated in whole or in part without the prior written consent of Spruce Point Capital Management LLC.

This article was written by

Ben Axler profile picture
Mr. Axler is the Founder and Chief Investment Officer of Spruce Point Capital Management, an activist hedge fund manager. Mr. Axler also co-founded Prescience Point Research Group (2012-2014). Mr. Axler specializes in activist short-selling, forensic financial research, and has exposed over $1.0 billion of alleged listed frauds on Nasdaq and the NYSE. Prior to founding his company in 2009, Mr. Axler spent eight years as an investment banker with Credit Suisse and Barclays Capital where he structured and executed billions of dollars of financing, derivative risk management, and M&A deals for leading Fortune 500 clients. Mr. Axler is a contributing writer to Seeking Alpha, has been profiled in Barrons, and in the book "The Happiness Advantage: The Seven Principles of Positive Psychology That Fuel Success and Performance at Work." Mr. Axler's short research has been profiled by the National Bureau of Economic Research (NBER) in an analysis entitled "How Constraining Are Limits to Arbitrage? Evidence from a Recent Financial Innovation," and shown to produce superior investment returns. In addition, according to a research study from Sumzero analyzing 12,000 analysts recommendations since 2009, Mr. Axler ranked #1 globally for idea performance. A recent analysis by Sentieo ranked Mr. Axler's @sprucepointcap profile the 13th most influential financial blogger on Twitter. Mr. Axler graduated from Yale University with a masters degree in Statistics, and received both a Bachelor of Arts degree in Statistics and a Bachelor of Science in Marketing and Business Administration from Rutgers College, where he graduated with Summa Cum Laude and Phi Beta Kappa honors.

Disclosure: I am/we are short WIX. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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