Why Is This A Good Time To Buy Wix Shares

Feb. 17, 2021 10:57 AM ETWix.com Ltd. (WIX)27 Comments
Bert Hochfeld profile picture
Bert Hochfeld
21.01K Followers

Summary

  • Wix is set to report earnings on Wednesday, Feb. 17, 2021.
  • We expect the company to report incrementally stronger revenue growth, with a likely improvement in the company's operating cash flow margin.
  • Wix continues to pivot its technology to address the ecommerce space.
  • The company now derives more than 20% of its revenues from business solutions, and that component of its revenue is growing at 60%.
  • The company is rated by 3rd party analysts as the leader in web site creation software, as well as, surprisingly, in the capabilities and functionality of its ecommerce platform.

Wix: A surprisingly undervalued ecommerce platform

Wix (NASDAQ:WIX) has been a company that has benefitted substantially from the evolution of the remote work/commerce paradigm. Not to the extent of a company such as Shopify (SHOP) which in many ways is a unique business that has done most things right and has been commensurately rewarded-particularly in terms of valuation. But Wix has not been behind hand in evolving to a company that is creating web sites for more sophisticated and larger enterprises and this has shown up noticeably in rising percentage growth. But while Wix overall, has not had nearly the growth of Shopify, Wix Stores, the most directly comparable part of the overall business has seen growth in the mid-60% range and Wix Business Solutions overall have grown by about 60%+ through the current fiscal year.

That said, however, the rising percentage growth has not recently been reflected in the share price-and in my opinion, therein lies an opportunity for investors-one of the rare chances in this market to acquire shares in a company with hyper-growth status but not with the typical EV/S ratio that goes along with that status.

Wix has been a bit of a controversial holding, lately, and indeed a contributor on SA recently published a remarkably negative article on the shares of the company. The article was predicated on the fact that Wix spends too much money on sales and marketing, and this has lead to a year in which the company’s EPS has turned negative. It should be noted that non-GAAP net income was positive in 2019 and in prior years, and the company has continued to generate positive free cash flow. But the issue that investors face with Wix is the decision the company has made to “put the petal to the metal” with regards to sales and marketing spend. The decision is not a willful one, but reflects some quantifiable trends with regards to conversion and spend on the platform. The company has introduced products that are focused on larger, professional users as well as creative agencies and other partners and these more sophisticated offerings are finding a significant level of traction.

I think that Wix has been controversial amongst institutions/hedge funds because of concern about its base of very small users who have seen their businesses upended during the pandemic. This is a rather over-arching phenomena in the IT space; the difference with Wix is that it has had a strong concentration in the SMB space-and indeed it still does. But despite that concentration, Wix has seen revenue growth accelerate the last couple of quarters as the company’s concentration on enterprise users is starting to drive faster growth. At this point, Wix is getting about 40% of its overall growth from its enterprise segment and I anticipate that this metric will continue to trend higher.

The new year is only a few weeks old and yet it is already has had its own share of excitement; there has already been a mini-panic brought on by the short-squeeze mania, and the RobinHood brokerage has weathered a liquidity storm. High growth names have continued to outperform with valuations that upset some readers and require strong execution. Investors have continued to focus on growth and immediate headline numbers. That has seeming left a few names with a decent outlook, but with some short term headline issues such as Citrix (CTXS) out in the cold-and it has been mighty cold and now snowy in the NY metro area.

But surprisingly, there are names whose growth is improving but whose share price has been stuck in neutral. One such name is Wix, an erstwhile holding in our high growth model portfolio. As readers/subscribers may know, the portfolio held Wix shares in the past. The position was sold in November 2019 at $136. It had been a somewhat OK holding; The position had been purchased about 15 months earlier at around $98 and that return was modestly ahead of the appreciation of the IGV over that period which was 26%; the Cloud computing index which I track as well (CLOU) did not yet exist in 2018.

We eliminated the holding back at that time because I was a bit frustrated with the company’s growth rate which was mired in the mid-20% range. I had thought that some of the company’s newer products and offerings would help reaccelerate growth. I was a bit impatient, as it turns out-although managing a portfolio is quite a bit different from calling individual names. While Wix shares are currently about 116% higher than where I sold them, the IGV has appreciated 71% and the CLOU index has appreciated by 96%. The high growth portfolio that I publish/manage for subscribers to our TickerTarget service has actually done quite a bit better than those percentages.

But all that is history and context, and this article is about the future for the company and its merits as an investment from its current level of valuation. Wix is a fairly well known name-it has millions of potential customers who have downloaded its free tier of software in order to create basic web sites. Last quarter, Wix reported 7.8 million new users compared to 9.3 million new users the prior quarter, and 5.5 million new users in the year-earlier period. But the case for Wix does not really rest on its growth in the consumer/DIY space, but the rapid growth in its business subscribers. The company’s Business Solution revenue rose 60% last quarter, and is now 20% + of total revenues.

When Wix had previously been a part of the high-growth portfolio, I was waiting or expecting to see a takeoff in this part of the business. Now that the takeoff is here, I think that the growth for this company can maintain a 30% CAGR over the coming 3 years-and possibly longer. While Wix shares are not precisely cheap: they are valued at a forward EV/S of around 12X, substantially below average for the company’s 30% growth cohort. The company is generating free cash flow-the current margin is about 13%. That is about average for the company’s growth cohort.

Why do Wix shares make sense at this point? Is there some specific catalyst? It has been more than 2 months since the company reported its Q3 earnings. The results were a noticeable beat in terms of revenues and a more modest beat in terms of earnings. The company wound up raising guidance modestly. Its forecast for top-line growth of 32% is the highest the company has made in at least 2 years, and represents growing momentum. The company’s billings growth forecast growth has now reached 36%.

This is not meant to be an article forecasting quarterly performance. I have rarely had much success trying to call quarters-or particularly how a specific company might respond to a particular set of kpi’s and forward guidance. It would be nice to believe that I had some kind of second sight about quarterly announcements. At this point-about a week before the scheduled earnings release, there have been no analysts who have changed either there rating or forecast on Wix, and while the shares have bounced substantially since the low they made at the trough at the mini-panic, I have not seen the excessive volume that usually marks speculative excesses. My best guess, for whatever it might be worth, is that like most software companies, Wix will report a strong quarter and present guidance for the current year greater than the 29% growth reported by the First Call consensus.

The last time, Wix reported, the shares wound up not responding to a beat and raise quarter; they fell quite noticeably in the days after the earnings release and have traded in a tight range since that time. The shares made a recent high of $295/share in October 2020 and the all-time high for the shares of just shy of $320 was set way back in August. Like many other high growth software names, they have rallied noticeably in the past 10 days or so, erasing the decline from the mini-panic that set in during the height of the mania regarding short squeezes. Overall, the shares are somewhat above (8.5%) where they were at the time when JP Morgan upgraded the name to Overweight in early December. Just as a comparison, the CLOU index has appreciated by about 13% over the same span.

I believe that some of the share price under-performance has been a function of the spike in sales and marketing spend, seen particularly in Q2, Sales and marketing spend jumped about 24% sequentially on a non-GAAP basis in that quarter and was up almost 68% year over year. Specifically, the company reported that it drove an advertising increase of 90% in the quarter, and in turn, the company acquired the largest user cohort in its history, that is expected to return 90% greater collections than have been produced by the same cohort the prior year. It is that kind of trade-off that seems controversial; this writer is entirely in favor of the strategy and it is obvious that it will produce a very high ROI in terms of cash generation.

The spike in sales and marketing spend calmed down a bit in Q3; the metric declined a few percent sequentially but Sales and Marketing spend was still up 50% year on year and was 44% of revenue on a GAAP basis-42% non-GAAP. The company, as it has done before, lowered its expectations for earnings after Q2, but raised its expectations for revenue growth.

As mentioned, this is a reasonable strategy based on quantifiable trends. The company has had a long standing strategy of relating the change in sales and marketing spend to in the performance of new subscription acquisition from existing cohorts. Wix has literally tens of millions of users who have downloaded the company’s free offering. The company, during the course of the pandemic, has seen that download growth has accelerated sharply, and that the conversion of those downloads to paid subscriptions has accelerated at a faster rate.

During the course of the last conference call, the company CFO, Lior Shemesh talked about the overall value of the cohorts in terms of future revenue commitments. That is a complex metric to unpack, and I would not make more of it than its existence. But the overall value of the cohorts has increased to $9.2 billion, which is up by 43% year on year. Given just how rapidly that metric has increased, it would be a very poor decision, indeed, not to ramp sales and marketing, to attempt to maximize the current opportunity.

As with any subscription business, spend levels are seen in the quarters prior to the acceleration of revenue growth. Wix has calibrated its marketing spend to take advantage in the improvement it has experienced in terms of cohort conversions. It obviously makes lots of sense for it to do so and the company has built up a substantial revenue stream that will be coming from new premium signups over the coming years.

The transformation of Wix

I will be straightforward here: much of what I am writing here relates to trends that I thought might reach fruition about 18 months ago. Most readers, if they know much about Wix, know it as a company that has been the leader in providing tools for what can best be described as DIY websites. Many millions of users have loaded the free version of the app over the course of several years and have created serviceable web sites that are used as a platform for numerous businesses. There is still growth in that business-it actually grew by 24% last quarter, but I would not be writing this article to comment exclusively about that business. It is still the greatest revenue contributor for Wix and that is likely to be the case for years to come and it is, to one degree or the other, the top of the funnel, at least for now.

About a year ago now, Wix began to separate its offerings into categories called creative solutions and business solutions. Business solutions include Wix payments which allows sites to accept credit cards. Not terribly surprisingly, payments has shown rapid growth; currently about 80% of new users in geos where the service is available have opted to include payments as part of their subscription. But overall, only about 30% of the sales transactions on the Wix platform are using payments, and the opportunity to move that percentage up is self-evidently substantial and will provide a strong tailwind to revenue growth.

In addition, business apps include tools to create web sites for stores, bookings/appointment applications, restaurants, hotels and video. Business Solutions has shown growth of greater than 60% on a year over year basis, and while management doesn’t forecast its specific growth rate, I think it is fair to assume that business solutions will continue to outgrow the more traditional, creative offerings by Wix.

The reason I am writing this article is that I believe that Wix has a substantial potential to re-attain and sustain 35% growth for a number of years, and the path to that growth is through the performance of its business solutions category.

Several years ago, Wix introduced a set of solutions it now calls Ascend. Ascend, as can be seen through this link, was essentially the initial offering from Wix targeting the higher end of the web site creation market that let developers create CRM functionality for Wix based web sites. It is probably best to think of Ascend as a competitor of HubSpot (HUBS), but it self-evidently is based on an architecture that provides a marketing solution for a web site from a different direction. For those readers interested in a more thorough look at Ascend, I have linked here to a description of what it does, and how it does it: Ascend by Wix | Your All-in-One Business Solution. In particular, Ascend includes the functionality necessary for a Wix site to deploy what is called SEO (Search Engine Optimization), a core component of any on-line marketing effort.

In 2016, Wix launched a product it called Code. Code was the start of an evolution that was designed to change the center of gravity for the Wix. Wix code was designed to be used by professionals rather than by the DIY community. As time passed, and as Wix Code matured, management decided to rename Code as Corvid. Corvids are actually a species of very smart birds-the crow family-said to be more intelligent than dogs and capable of some form of speech, cause and effect reasoning and the ability to use tools suited for their physiology. So, Corvid made sense as a product name in 2019, but obviously was not a great name to use in 2020 during a pandemic caused by the Covid-19 virus. The company moved to rebrand the offering, and the functionality of what had been called Corvid is now called Velo-which stands for velocity and which is supposed to convey just how fast users can develop a web site. And of course, it doesn’t sound like the virus that has killed and maimed so many. Velo is not a chargeable SKU, but is embedded as a capability within many of the other Wix web design/build products.

Over the years, Wix has launched a variety of products targeting several vertical markets. The company acquired something called Deviant Art, to add web designers in finding-well this writer considers the art available as quite deviant. And the company offers enterprise features that are necessary to compete in the high end of the e-commerce market place. The company offers enterprise security features, scalable hosting, appropriate certifications and privacy features. At this point, it has loads of 3rd party integrations, its development tools are probably its strength and it offers at least primitive collaboration tools. The company offers specific offerings for restaurants, bookings, blog offerings and it has a competitive capability when it comes to creating on-line stores.

A couple of years ago, Wix started to offer users traditional support and even on-boarding services. This is a business capability for professional users looking for the kind of support they are likely to get when using packaged application software, and it has some unique features that are particularly valuable for Wix users. It is both a competitive differentiator and a source of revenue-I imagine that the former is more valuable for Wix than the latter.

Wix now has a product called Editor X which has recently been made generally available. I have linked to the currently available literature here: Responsive Web Design | Website Creation | Editor X Editor X is not really for the typical Wix DIY user-its target market is basically that of web designers and agencies. Here is a review of the product from a 3rd party: The Wix Editor X Review You've Been Waiting For.

I go out of my way to avoid giving reviews of various products. I do not believe I have the qualifications to do so successfully, and of more importance, I am not sure how a favorable product review necessarily translates into a successful product offering. And it is harder, still, to correlate the success of a particular product, with an overall forecast for a company.

Editor X, the company's latest and most sophisticated web site design engine was launched out of beta within the past week. I expect there will be a further discussion of the product and its potentials on the upcoming conference call . But it is not going to move the needle for Wix until sometime in the back half of the current year, I imagine. I am expecting/hoping that Editor X will have noticeable effects on Wix growth for the next several years. I would never base a recommendation on the success of a single product, but it should be obvious that Editor X is of great significance in any forecast or set of expectations that might be held for this company. The space in which Editor X competes is no doubt crowded with some well known vendors-but it seems likely based on the reviews I have seen and the features that are available, that this offering will further enhance the transformation of Wix from web site builder to a major presence in the e-commerce space.

Competition

There are so many competitors in this “space” that it is difficult to keep them all straight. I think the best way to think about competition would be to look at Wix as a competitor in two spaces: one of those is web site design and hosting, and the other e-commerce.

I don’t think that anyone would even attempt to suggest that Shopify is not the leading factor in the e-commerce space-or that it will not continue to be the leader for the foreseeable future. As it happens, this writer personally uses Shopify in another venture unrelated to writing articles regarding IT companies. It offers amazing functionality and has great ease of use and deployment.

On the other hand, I think most observers believe that Wix is the leader in the market in terms of the tools and functionality it offers to build web sites. There is a difference, at least for now, although as I have been at some pains to document, Wix is trying to remain as a leader in one space and become a significant competitor in another space.

I think it helpful to focus this section on what may be controversial and not totally known, and that is the positioning of Wix as a platform on which to build a store, or an e-commerce business. As mentioned, when anyone talks about ecommerce, the vendor that jumps to mind is Shopify-and with the team in place running that business, I expect that to be the case for the foreseeable future. But here is a review from a 3rd party industry expert that calls out Wix as the best all-around ecommerce platform: Wix Ecommerce Review 2021 | Get All the Facts Before Signing Up. Some of what is presented in this review may be of a surprise to some readers. For those readers who do not wish to read the linked article, the following summarizes the content at a high level, “Wix is the best overall ecommerce platform on the market. How do we know Wix is the best ecommerce option, beating other brands such as Shopify, BigCommerce, Weebly and Squarespace? We’re not just guessing – we tested them all, and got everyday people to test them too.

We looked at all the important areas, from features and pricing to ease of use. This article will take you through what we found, and tell you once and for all if you should choose Wix eCommerce to build your online store.

We’re not going to draw it out – here’s an overview of how Wix scored in our testing:

Best all-around ecommerce platform

4.7

out of 5

TOP CHOICE

Ease Of Use

3.6 out of 5 stars

Design Flexibility

4 out of 5 stars

Website Features

4.4 out of 5 stars

Sales Features

4.3 out of 5 stars

Help and Support

4.7 out of 5 stars

Value For Money

4.5 out of 5 stars

Customer Score

4.5 out of 5 stars

Try for Free

The point of this article is not to help readers decide which ecommerce platform to acquire. The question of concern to investors is: Does Wix have a platform that will allow it to gain market share in the ecommerce space. Product functionality isn’t everything. I simply do not see Wix overcoming Shopify when it comes to the ecommerce market-Shopify has such tremendous share of a mind, and it has a more than adequate product for the needs of most users.

But acknowledging Shopify’s advantages, what I think I can assert is that if a vendor offers the best product at a competitive price and spends adequate funds effectively on sales and marketing and customer support, it is likely that the vendor will wind up with a decent market share. The ecommerce space is vast, and despite the explosion in usage in the past year, it is still nascent. Ecommerce is still less than 20% of the total volume of retail sales in this country, and less than that in most other geos. It is one of the reasons why investors are willing to afford Amazon (AMZN) shares a substantial multiple. The opportunity for Wix, relative to its size is of a magnitude that suggests mid-30% growth is a very reasonable expectation in projecting a 3 year CAGR.

I am not going to spend lots of time reviewing the website development market. It is not growing all that fast these days although it is quite large. The DIY component of the market is apparently about $24 billion in annual revenues and is growing at around 5%. The overall market size is reckoned to be about $41 billion according to a study by IBIS world that I have linked here: IBISWorld - Industry Market Research, Reports, and Statistics Another study by a different organization evaluates the size of the market for the software tools that developers use at around $10 billion: Global Website Builder Software Market Will Reach USD 13,605 Million By 2027: Zion Market Research.

Wix continue to attain favorable reviews by 3rd parties. This one is probably the best review available for most readers: 17 Best Wix Alternatives - Find out more about Wix competitors I think it is fair to say that from a standpoint of technology, that Wix leads the pack when it comes to building a web site, and that is well placed in the market space for developing an ecommerce web site. I expect the company to continue to grow its market share for the foreseeable user.

Wix business model and its valuation

Although Wix shares have rebounded significantly as I prepared this article, their valuation has apparently been constrained by their earnings guidance and their elevated sales and marketing spend. Wix has a rather formulaic way (TOI) of determining sales and marketing spend depending on the strength of the company’s conversions and average revenue.

As mentioned, Wix competes in hotly competitive spaces and price competition is a fact of life. Wix is not the low priced offering in its spaces and from time to time, it runs promotions and special offers for potential consumers. This is a current offer for Wix: 2021 Wix Promo Code Deals, Discounts & Special Offers. I do not think price competition has been more or less of a factor over the past quarters, but gross margins do have a tendency to bounce around in a particular quarter over the course of a year.

Last quarter, Wix saw gross margins fall by about 400 basis points year on year, partially due to mix, and partially due some of the new products that the company has most recently introduced. A couple of years ago, Wix initiated its customer care offers for subscribers who wanted help in on-boarding and who needed premium maintenance. The expense of building out this organization is reflected in the company’s gross margins as the utilization is inevitably lower than optimal levels in the early years of building a support infrastructure.

In addition, the rapid growth that Wix has seen has required a substantial increase in investment in hosting infrastructure, not all of which is amortized in the very short term. The gross margins that Wix gets from partners and agencies are lower than its gross margins on direct sales; those sales are rising as a percentage of the total and have influenced the trend of gross margins. The company has lots of different pricing plans for a number of different SKU’s and it frequently runs promotions. Overall, management has maintained that price competition has been at a consistent level for some time now, and I have no reason to suggest that this is not the case.

I have written above about the marketing spend which was at a 42% ratio non-GAAP last quarter compared to a 37% ratio in the prior year. I think it is reasonable to anticipate that over the next 12 months the sales and marketing ratio will return to and possibly go below the rates that had been traditional. It has not been unusual for this company to ramp marketing spend in periods when its cohorts are spending more with it as has most recently been the case. The pivot to partners and agencies is likely to create lower marketing spend ratios and as more of the company’s business comes from apps such as payments and other higher-priced services, I would expect some improvement in the ratio. But if elevated advertising spend is really going to be able to produce some dramatic increase in the spending of cohorts, Wix would be terribly foolish not to continue to spend extra for as long as that trade off remains available.

Last quarter, the company’s research and development expense ratio was 25% essentially flat with the year earlier expense ratio for this category. The General and administrative spend ratio fell from 8% to 6.4% year on year.

Overall, the company’s non-GAAP operating margin loss last quarter was approximately 3% compared to an operating margin of 6% in the prior year. The company does not specifically project operating margins as part of its published guidance. It does, project free cash flow and that metric is forecast to be about 7.5% for this current quarter. Most analysts work backward from that estimate and have adjusted their EPS forecast to a Q4 loss of about $.11, quite a bit above the loss that had been projected prior to the last earnings release.

Typically, the company has beaten estimates, although that was not the case in Q2 of this year when, as indicated, the company took advantage of a specific opportunity and substantially grew its marketing spend due to the success it had been achieving in terms of conversions and sales of additional products. Given the overall trend of results I have seen, I would be surprised if the company did not report upside results when it publishes its Q4 numbers next Wednesday.

Currently, the consensus projection for revenue growth in the recently started fiscal year is for 29%. Again, based both on the overall business environment, and the anticipated success of Editor X which should show strong incremental growth as the year progresses, I have forecast revenues to reach $1.325 billion this current year, which would be growth of about 34%+ year over year. That yields an EV/S of about 12X. That represents a discount of almost 40% from the average EV/S for the 30%+ growth cohort.

I expect that operating margins and free cash flow margins will remain at levels consistent to the company’s forecast for all of the past year. The company is projecting a full year free cash flow margin, less its Wix HQ expenditure, of about 13%. That’s a free cash flow margin a few percent above average for the company’s growth cohort.

Wix has put into place the elements necessary for a successful pivot to become a major factor in the ecommerce market. The results of the company’s efforts are nascent thus far, but the third party reviews are glowing. A company with a growth recrudescence based on developing a substantial market position in the ecommerce space with an attractive business model should be worth more than, rather than substantially less than the average EV/S. And its cash generation capability puts it further ahead when it comes to valuation.

Wix shares are relatively undervalued and should produce strong levels of positive alpha if the strategy of a pivot continues to be well executed.

This article was written by

Bert Hochfeld profile picture
21.01K Followers
Bert Hochfeld graduated with a degree in economics from the University of Pennsylvania and received an MBA from Harvard. Mr. Hochfeld has enjoyed a long career in the tech world, working for IBM, Memorex/Telex, Raytheon Data Systems, and BMC Software. Starting in the 1990s, Mr. Hochfeld worked as a sell-side analyst and won awards from the Wall Street Journal for his coverage of the software space. In 2001, Mr. Hochfeld formed his own independent research company, Hochfeld Independent Research Group, which provided research services to major institutions including Fidelity, Columbia Asset, SAC Capital, and many other prominent institutions and hedge funds. He also operated the Hepplewhite Fund, a hedge fund that specialized in technology investments. Hedge Fund Research, an independent 3rd party firm that specializes in ranking managers, rated the Hepplewhite Fund as the best performing small-cap fund for the 5 years ending in 2011. In 2012, Mr. Hochfeld was convicted of misappropriating funds from a hedge fund he operated. Mr. Hochfeld has published more than 500 articles on Seeking Alpha, all dealing with companies in the information technology space. Highly esteemed for his investment wisdom accumulated over decades, Mr. Hochfeld ranks in the top 0.1% of Tip Ranks analysts for his selection of information technology stocks and their subsequent successes.

Disclosure: I am/we are long WIX. 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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