ContextLogic's Sales Growth Is Incredibly Cheap After A Near 30% Drop

Jul. 31, 2021 2:19 AM ETContextLogic Inc. (WISH)37 Comments14 Likes
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Summary

  • Shares of ContextLogic dropped almost 30% since June.
  • ContextLogic is building a logistics business which is already driving the firm's revenue growth. Logistics revenues accounted for 32% of revenues in Q1'21.
  • I expect the logistics business to be a key driver of growth for ContextLogic going forward.
  • ContextLogic's sales growth has become even cheaper on the drop, relative to other E-Commerce rivals.
  • Based on rival P-S ratios, ContextLogic's valuation could double, which is why I bought the drop once again.
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After a near-30% drop, shares of ContextLogic (NASDAQ:WISH) and the sales growth that comes with it are significantly undervalued. The E-Commerce platform is building an ad and a logistics business behind the scenes, creating new revenue streams in the process. I believe the revenue growth potential of ContextLogic’s logistics business is greatly underestimated, which makes the stock a buy!

E-commerce platform value, user growth and soaring logistics revenues

ContextLogic’s sell-off accelerated this week and shares dipped below $8 before bouncing back to about $10. ContextLogic’s year-to-date return is -46.5% after the initial excitement over the E-commerce platform’s growth faded. I believe the near-30% drop in ContextLogic’s market value creates a buy-the-drop opportunity as the firm is so much more than just an E-commerce marketplace.

Chart
Data by YCharts

The value of ContextLogic’s platform lies predominantly in its user growth. ContextLogic has grown its monthly active users (MAUs) from 21M in 2015 to 107M in 2020 and if the shopping app continues to grow at the same rate as it did in the past, the E-Commerce platform could have 555M monthly active users by 2025. I derive this number by applying ContextLogic’s average annual growth rate from 2015-2020, which was 39%, to the firm’s FY 2020 monthly active users. This estimate does not consider accelerating user growth through acquisitions, however.

ContextLogic’s discovery-focused app has regularly been among the most downloaded shopping apps in the world, a fact that may not be very well known. In 2020, the Wish app was the third most downloaded shopping app in the world, just behind Amazon (AMZN) and Shopee (which is very popular in Asia). The Wish app got 138M downloads in 2020 while its biggest rival, Aliexpress - which also mostly sells merchandise from China - got “only” 79M downloads.

(Source: Apptopia)

The Wish app was also one of the most downloaded shopping apps in the US in 2020, coming in third behind Amazon and Walmart (WMT) with 30M downloads.

(Source: Apptopia)

The extremely high number of Wish app downloads proves the popularity of ContextLogic’s E-commerce platform and I already touched on the E-commerce firm’s impressive user growth and growing monetization success before.

But what is truly impressive about ContextLogic’s business - besides strong MAU growth, app downloads and growing monetization success - is that the platform’s revenues have grown twice as fast from 2015-2020 than its user base. In 2015, ContextLogic had $144M in revenues which have grown at an average rate of 78% annually to $2.5B in 2020. ContextLogic’s revenues are soaring, predominantly for two reasons: Customers that are using the Wish shopping app are increasing the dollar amount of their purchases over time, and ContextLogic is building a logistics business behind the scenes that solves three problems at once: It reduces shipping times, it lowers shipping-related order refunds and it creates a new separate business with fast growing revenues.

Logistics revenues were largely responsible for the acceleration of ContextLogic’s revenue growth in 2020. ContextLogic saw total revenue growth of 34% from FY 2019 to FY 2020 but logistics revenues surged 275% Y/Y during that same period because the E-commerce business really took off during lockdowns. In 2019, ContextLogic’s logistics revenues were $137M (total sales $1.9B) which calculates to a small 7% revenue contribution. A year later, the logistics business already had revenues of $514M and contributed 20% of total revenues. In Q1’21, ContextLogic’s logistics revenue growth accelerated (338% Y/Y) and was 8.4 times larger than growth in actual marketplace revenues while the share of logistics revenues increased from 13% to 32%.

mil $

Q1'21

Q4'20

Q3'20

Q2'20

Q1'20

Y/Y Growth

Core Marketplace Revenues

$477

$527

$405

$555

$340

40.3%

ProductBoost Revenues (Ad business)

$50

$62

$49

$45

$44

13.6%

Logistics Revenues

$245

$205

$152

$101

$56

337.5%

Total

$772

$794

$606

$701

$440

75.5%

(Source: Author)

It is hard to make money on E-Commerce platforms because competition is high and margins are low, but creating a logistics business that solves a real customer problem - shortening shipping times - may not only be a differentiating factor for Wish but it is developing into a significant long term revenue opportunity. If ContextLogic continues to grow its user base as expected (555M MAUs by 2025) and continues to see an increasing uptake of expedited shipping options, the logistics business could crush revenue and growth expectations.

To see this, let’s assume that ContextLogic can grow revenues at 30% this year with growth rates linearly declining by 2.5 PP each year until FY 2025. This means ContextLogic could have revenues closing in on $8.0B in four years. Since ContextLogic is seeing much faster growth in logistics revenues than anywhere else (including the ad business), the share of logistics revenues is poised to increase as well. In Q1’21, the platform already generated 32% of sales from its proprietary logistics business. If this percentage grows to 40% by 2025, ContextLogic is looking at revenues of $3.2B in 2025, which does not consider yet a boost to user growth through acquisitions and the upside in ContextLogic’s native advertising business.

Growing addressable market for cross-border transactions

Wish’s suppliers are mostly located in Asia (although this is slowly changing as the merchant base diversifies) while the majority of its customers are in Europe and North America. Together, these two geographies generated 88% of the platform’s Q1'21 core marketplace revenues.

(Source: Wish)

Online shopping really took off during the pandemic and ContextLogic’s core marketplace revenues soared 63% Q/Q in Q2’20 to $555M. Global E- Commerce volumes are expected to grow 56% from 2020 to 2023 according to Oberlo... creating a growing addressable market for ContextLogic's platform.

(Source: Oberlo)

Shoppers in the US and in Europe, led by the UK, are responsible for most cross-border E-Commerce transactions in the world (Wish’s core markets), so there is a huge market and growing logistics opportunity for ContextLogic.

(Source: Practical ECommerce)

Buy-the-drop opportunity

After taking a second look at ContextLogic’s proprietary logistics business and the growing addressable market for (cross-border) E-Commerce transactions, I like ContextLogic’s evolving business model and vertical integration plans even more than before. The near-30% drop in ContextLogic’s valuation in July has made the platform’s dollar sales growth even cheaper. If ContextLogic’s sales growth was valued like the sales growth of other major E-Commerce platforms, which it should, a P-S ratio of 4.0 would need to be applied to the firm's revenue base. Applying a sales multiplier factor of four to Wish’s revenues results in a market value of $12.3B, implying 92% upside.

Market Cap

FY 2021 Est. Revenues

P-S Ratio

FY 2021 Est. Earnings

P-E Ratio

Wish

$6.4 billion

$3.15 billion

2.0

-$0.56

-

Amazon

$1,806.3 billion

$490.27 billion

3.7

$55.86

60.3

Alibaba

$555.0 billion

$143.5 billion

3.9

$9.70

20.1

eBay

$49.0 billion

$12.0 billion

4.1

$3.95

18.6

(Source: Author)

Risks with ContextLogic

Because the E-Commerce platform is not profitable (yet), ContextLogic has attracted a high short interest. About 19% of ContextLogic’s float is shorted which means price movements in the stock are highly unpredictable. Wish is not an illiquid stock with 339M shares floating, but the stock may become an even bigger target for short sellers if the platform fails to generate profits in the future. ContextLogic caught some meme buzz because of its high short interest, but I believe the marketplace platform and logistics revenue opportunity give better reasons to buy the stock, despite a lack of short term profits.

(Source: Yahoo Finance)

What would change my opinion on ContextLogic is if revenue growth slowed. I believe revenue growth in E-Commerce will be strong in the short term and revenue estimates for major E-Commerce platforms also indicate strong growth rates this year: Amazon, Alibaba (BABA) and eBay (EBAY) are expected to see sales growth of 27%, 31% and 17% (Source: Seeking Alpha) in FY 2021 with Wish ranking third with an estimated revenue growth of 24% (my estimate is for 30% growth due to momentum in Wish’s logistics business). But, revenue growth may slow as COVID-19 restrictions are lifted and stores operate normally again. Slowing revenue growth as the world exits “lockdown” is a big risk for the stock. But, if the pandemic gets worse, or new lockdowns are initiated again, ContextLogic's revenue growth has potential to accelerate.

Final thoughts

After a near-30% drop, the upside has improved to almost 100% as the E-Commerce firm's revenues are likely going to soar in FY 2021, driven by logistics revenues that are seeing momentum. Since ContextLogic’s sales and growth rates are impressive and comparable to bigger E-Commerce businesses, the stock should revalue higher. A fairer price for Wish, based on my projections for MAU and (logistics) revenue growth, is $20.

This article was written by

The Asian Investor profile picture
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I look for high-risk, high-reward situations. Five largest portfolio holdings: AMD, Micron, Alibaba, Ethereum, PayPal. Early buyer of cryptocurrencies. I live in Thailand and Canada.
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Disclosure: I/we have a beneficial long position in the shares of WISH either through stock ownership, options, or other derivatives. 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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