Wix Is A Buy: Strong Growth And Positive Free Cash Flow

Summary

• WIX is a leader in the DIY website building market.
• It is growing revenues at a 25% clip.
• The company trades at 7 times trailing revenues.
• The stock is a buy.
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Wix (NASDAQ:WIX) fell sharply after earnings as growth projections didn’t meet the expectations of Wall Street. The stock has never stopped falling ever since. The DIY website builder has fallen 40% off all-time highs and now trades at a single-digit multiple of trailing revenues. With a solid balance sheet and positive free cash flow generation, WIX can survive the current market volatility. I rate shares a Buy.

The Website Builder Named Wix

Wix has become somewhat of a household name when it comes to building a website. I know from my own experience using it that Wix makes the website building experience much easier.

(Source: Investor Presentation)

In the past, one might have to learn some software development languages such as HTML, but WIX’s easy-to-use templates changed the game. It uses a freemium model, which reduces friction for growth. WIX has seen impressively consistent registered user growth, and also impressive premium subscription growth.

(Source: Investor Presentation)

Once a customer signs on, they are likely to increase their relationship with WIX as they seek to improve their website and business - WIX’s Corvid enables advanced web developers to build a fully functional online business, all through WIX:

(Investor Presentation)

Naturally, this has led to steady growth in average revenue per subscription:

(Source: Investor Presentation)

As one of the market leaders in DIY website building, WIX has benefitted from strong revenue growth. Trailing revenue growth of 25% and forward revenue growth of around 25% is impressive for any company:

(Source: Investor Presentation)

While the company is not yet profitable on a GAAP basis, a large amount of its employee costs is stock-based compensation. As a result, WIX has been free cash flow positive - and deeply so - for several years:

(Source: Investor Presentation)

WIX appears to be an easy-to-understand name seeing impressive growth, with a valuation made reasonable due to the broad market selloff (I’ll discuss the valuation below). Let’s now analyze the company's balance sheet.

Balance Sheet

From the perspective of financial flexibility, WIX has a strong balance sheet with over $500 million in cash and short-term investments. The company has virtually no long-term debt and does have $359 million in convertible notes. These notes are due in 2023 with a conversion price of $142.63 per share. While WIX is currently far off that price, I do expect the stock to trade higher than $142 by 2023, if not much earlier. As a result, I have included these convertible notes in my calculation of shares outstanding below.

WIX’s strong balance sheet and positive free cash flow generation mean that its financial position is not only rather strong during these periods of tumultuous times, but the company can even take advantage.

It has extended its $100 million share repurchase program to June 2020. We will have to wait for the next earnings call to see if WIX repurchased any shares at these bargain basement valuations.

Valuation

WIX trades at only 7 times trailing sales, or 7.3 times assuming conversion of the convertible notes. While WIX is not currently GAAP profitable, I expect operating leverage to eventually lead to operating margins around 25% or higher. This would suggest that shares are trading at approximately 29 times “ultra-forward” earnings.

My 12-month fair value estimate is $180, or 12 times forward sales. Shares have around 90% upside to that price target.

Risks

• I may have overestimated WIX’s growth runway and operating leverage. In such a scenario, it may not achieve my projected 25% long term operating margins. Without GAAP earnings, the stock does not trade with traditional margins of safety. Investors should be very bullish on the company’s ability to take market share in a growing online market.

• WIX’s recurring revenues may be tested during this market turmoil. I am counting on the company's subscription-based nature to lead to consistent growth, but it is possible that many customers take this opportunity to cut down on costs, including WIX subscriptions. On the flip side, widespread lockdowns may be making more people develop websites. We will have to see how this plays out.

• The online website building market has intense competition. Some of WIX’s competitors include well-known names with deep pockets, such as Wordpress and Google Blogger (GOOGL). WIX may not be able to maintain pricing power due to the competition if it is not able to adequately differentiate its products from competitors.

Conclusion

The coronavirus and widespread market panic have created many buying opportunities - WIX looks like a fat pitch. With a strong balance sheet and solid growth, shares appear materially undervalued at around 7 times trailing revenues. I rate shares a Buy.

(TipRanks: Buy WIX)

Disclosure: I am/we are long WIX, GOOGL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.