Wix: A Good Buy After The Pullback

Mar. 25, 2020 12:20 PM ETWix.com Ltd. (WIX)1 Comment2 Likes
Stefan Ong profile picture
Stefan Ong
909 Followers

Summary

  • Wix has fallen roughly 37% since its 52-week high.
  • The company has grown strongly with revenue growth rates above 30% in recent years.
  • Moreover, Wix is undervalued by 25% based on my estimates.

Wix (NASDAQ:WIX) stock price has fallen roughly 37% from its 52-week high, mostly due to multiple adjustments from the recent market turmoil. Despite the big drop in share price, I believe that Wix has a strong track record with growing brand name and switching costs. At $97.22, it is undervalued by roughly 25% based on my base-case assumptions.

(Source: Google)

Wix has grown strongly while expanding its addressable market

Wix has achieved revenue growth above 30% in recent years. Revenue has grown from $230M in 2015 to $761M in 2019, compounding at 30% year on year. Throughout the same period, gross margins have maintained above 70% at 74% in 2019.

Looking from 2015, Wix had a history of continuous innovations that have expanded its suite of offerings. These innovations have dramatically increased Wix's total addressable market to the current $300B+.

(Source: Investor Presentation)

Wix has a strong brand with switching costs

Wix has steadily grown both its registered users and premium subscriptions. Registered users grew from 54M in 2014 to 165M in 2019, while premium users grew from 1.1M to 4.5M in 2019. This highlights the strength of Wix's brand as users continue to find value in using the company's services.

By providing a great service, Wix has also managed to extract a higher value from customers as seen from the growth in average revenue per subscription from $143 in Q2 2017 to $179 in Q4 2019.

(Source: Investor Presentation)

As users use more of Wix's services in creating an online website for their business, they become embedded onto Wix's platform. Wix then becomes a core aspect of the users' businesses. As Wix provides services for the businesses' various needs, it greatly increases the likelihood that they remain users. This can be seen below in how there is increasing monetization of users even from 2010.

(Source: Investor Presentation)

Investment Risks

Wix's key markets include small-to-medium businesses. In an economic downturn, these businesses are more prone to business slowdown or failure, which could lead to stronger churn rates for Wix. Although Wix has been targeting agencies that create multiple websites for its clients, this only makes up a small percentage of its user base.

Wix also faces intense competition in its space that may lead to slower customer adoption on its platform. Some of these competitors include Squarespace, Weebly, and WordPress. Wix has to ensure that its platform continues to delight customers to gain market share and keep them from switching over to competitors.

Wix is undervalued based on my estimates

1) Revenue growth at 20% for the next five years, then dropping to 2% in perpetuity starting from the year 2025. The high growth rates in the first five years reflect Wix's track record of high sales growth and its ability to expand its total addressable market. However, intense competition might put a lid on high sales growth in the future as Wix continues to expand its offering.

2) Operating margin of 30% from 2027 onwards. Software players generally have high operating margins due to their high initial fixed costs and low incremental costs. Wix's gross margins have remained above 70% since 2015. Once Wix scales further and profitability becomes a priority, the company should experience a high level of operating margin expansion through operating leverage. However, if Wix has to incur higher customer acquisition costs due to strong competition, there could be some downward pressure on its margins in the near term.

3) A sales-to-capital ratio of 2 is in line with its software peers. Developing software is not capital-intensive, so I estimate Wix will be able to generate $2 of sales with every $1 in incremental capital.

4) Wix has an initial weighted cost of capital of 9%, which drops to 8% in the terminal year. The higher cost of capital reflects the higher risk of Wix having negative operating income and losing money. However, once the company achieves profitability and higher free cash flows, the risk should be reduced as reflected in the lower cost of capital.

(Source: Author creation using Wix financials) (Figures are in $millions except per share data and percentages)

The value I derived for Wix is roughly $6.1B for the entire company. This represents a 20% upside from its current price. As with all DCFs for high-growth companies, my point estimate valuation of $121 is likely to have a large spread of possible outcomes. To overcome this shortcoming, I compare its pricing multiples against other software companies.

Companies Price/Sales Ratio EV/Sales Ratio YOY Sales Growth (%) Operating Margin (%)
Wix 6.45 6.16 26 -10
Appian (APPN) 8.91 8.77 14 -20

New Relic (NEWR)

3.89 3.53 28 -12

Okta (OKTA)

23.09 23.68 46 -31

(Source: Author creation using data from Seeking Alpha)

Compared to other high-growth peers, Wix looks fairly cheap in terms of price/sales and EV/sales ratios. Wix is priced cheaper than Appian which has roughly the lower growth profile and worse operating margins. Wix is also priced much cheaper than other SaaS companies like Okta.

Potential investors have to decide if they believe Wix will be able to execute according to my base-case assumptions in the long run. If competition turns out to be stronger than expected and pushes down future sales growth, the recent pullback might not make Wix a screaming buy.

This article was written by

Stefan Ong profile picture
909 Followers
Focused on buying high-quality businesses and holding them for the long term. My initial investment strategy was to buy dividend-yielding stocks and REITs to generate passive income. This changed recently as I have more time to study companies. Besides, finding businesses that can reinvest earnings and compound returns at a higher rate is much more rewarding.
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Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in WIX over the next 72 hours. 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.

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