Wix: Buy The Dip On This High-Growth Stock
Summary
- Wix is a leading player in the cloud-based web development space.
- It's moving up in the customer value chain and the Rise.ai acquisition should further widen its moat around the business solutions segment.
- I also highlight the valuation, balance sheet, and other points worth considering.
Investing in megatrends can be a profitable move for investors looking to capitalize on seismic shifts in consumer tastes and buying behavior. E-commerce has been a megatrend for some time, and the course of events over the past 12 months has only accelerated this trend.
This brings me to the “pick and shovel” play in Wix.com (NASDAQ:WIX), whose price has taken a beating recently. In this article, I evaluate what makes this a good buying opportunity on this growth name, so let’s get started.
A Moat-Worthy Name
Wix is a leading cloud-based website development platform with over 200M registered users worldwide. Its website builder enables millions of businesses, organizations, artists, and individuals to take their businesses, brands, and workflow online. Its products include the Wix Editor, Wix ADI, Editor X, Ascend, and Velo, enabling users to build and manage a fully integrated digital presence.
Wix is headquartered in Tel Aviv, with a presence in N. and S. America, Europe, and Japan, and in 2020, generated $989M in total revenue. Over half of Wix’s revenue (57%) stems from N. America, and just over a quarter (26%) comes from Europe, with the remainder coming from Asia and Latin America. As seen below, Wix is seeing strong double-digit penetration in nearly all geographies.
(Source: Company Investor Presentation)
Like many e-commerce enabling companies, Wix’s business is built upon a freemium model, in which certain basic features are free, after which customers need to pay for the more advanced features. This helps to drive customer adoption, thereby creating a healthy ecosystem of users, power users, and subject matter experts.
Wix has demonstrated strong execution on its business strategy, as reflected by strong revenue growth in recent years. Since 2017, Wix’s revenue has more than doubled, from $426M to $989M in 2020, equating to an impressive 32% CAGR. I’m also encouraged by the increase in the customer value chain over the past decade. As seen below, newly acquired customers have moved up the value chain with each passing year. This tells us that Wix has been able to attract larger and higher value customers who require more of Wix’s premium features.
(Source: Company Investor Presentation)
The growth continued in the company’s latest reported quarter, Q4’20, with revenue growing by 38% YoY. This was driven by the influx of e-commerce businesses, improved retention, and increased value of new customer cohorts. Creative Subscriptions ARR (annual recurring revenue) grew by 24% YoY, and the Business Solutions segment is showing more promising growth, with revenue growing by 95% YoY, driven by growth in Wix Payments. Business Solutions currently represent 23% of Wix’s revenues, and I expect this share to meaningfully increase over the next few years.
(Source: Company Investor Presentation)
Looking forward, I see reasons for continued optimism around Wix, as management is guiding for 30-32% YoY revenue growth in 2021. That’s because Wix is seeing increasing growth in online commerce cohorts compared to non-online commerce cohorts. This results in more value for Wix, considering that online commerce cohorts exhibit stronger retention, business product adoption, and use Wix payments more frequently.
Plus, I see potential for Wix to grow its economic moat, as the CEO expects that nearly half of all new things on the Internet will be built on Wix in 5 years' time. Meanwhile, I also don’t see management sitting on its laurels as it continues to launch new product offerings, including Editor X this year, which should attract more enterprise customers.
Lastly, I see the announcement today of the Rise.ai acquisition to be a plus for the company, as it appears to be a good bolt-on complement to Wix’s business payments segment. That’s because Rise.ai is a gift card and customer re-engagement solution for online brands. Customer retention is a top priority for e-commerce brands, as acquisition costs continue to spike, and this acquisition enables Wix to help its customers to manage customer activities with a focus on spend and repurchases through gift cards and loyalty programs.
Meanwhile, Wix maintains a strong balance sheet to fund this acquisition and future growth, with $1.04B in cash and short-term investments. This more than covers $834M in long-term debt, resulting in a negative net debt balance.
Turning to valuation, I find Wix to be reasonably priced for growth at the current price of $291, with a Price/Sales ratio of 15.9. As seen below, analysts expect robust revenue growth over the next several years, bringing the forward P/Sales ratio down to the single digits based on 2023 sales estimates. As such, I see the recent share price weakness as presenting a buying opportunity. Analysts maintain a Strong Buy rating (score of 4.6 out of 5) and an average price target of $353.
(Source: Seeking Alpha)
Risks to Consider
No investment is risk-free, and the following points are worth considering:
- Wix is not yet a profitable company from an earnings standpoint, and analysts expect for it to generate positive earnings in 2023. Those uncomfortable with this risk profile may want to avoid the stock.
- Wix’s gross profit margin has declined in recent years, from 82% in 2018 to 68% in the latest reported quarter. This was the result of Wix’s aggressive hiring on the customer care front. However, management expects for gross margin to return to 80% by the second half of 2022.
- Potential for increased competition from the likes of Wordpress, Squarespace (SQSP), and Shopify (SHOP) may present obstacles for Wix to meet its growth objectives. However, overall robust growth in the TAM (total addressable market) may buffer some of this risk.
Investor Takeaway
Wix is a leading “pick and shovel” type e-commerce play that’s set to benefit from the continued growth of online businesses and customer engagement. Looking forward, I see the business solutions and payments segment as being a meaningful growth driver, and the recent acquisition of Rise.ai should further widen Wix’s moat around this space. Meanwhile, Wix maintains a strong balance sheet, and I see the recent share price weakness as being a buying opportunity for the growth portion of a well-diversified portfolio.
This article was written by
I'm a U.S. based financial writer with an MBA in Finance. I have over 14 years of investment experience, and generally focus on stocks that are more defensive in nature, with a medium to long-term horizon. My goal is to share useful and insightful knowledge and analysis with readers. Contributing author for Hoya Capital Income Builder.
Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within 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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