Founded in 2010 by Piotr Szulczewski and Danny Zhang, Wish is an American online e-commerce platform. It has a user base of over a million users, and the company has experienced impressive growth since it was launched. However, there are some factors that may keep the stock from being an asset class that is worth a lot of money. Here are three reasons why:
ContextLogic’s valuation metrics indicate that the stock may be undervalued
Whether or not ContextLogic stock is undervalued depends on a few fundamental metrics. These include the Price-to-Earnings ratio, the Enterprise Value-to-Revenue ratio and the PS ratio. If these metrics are below their historical ranges, the stock may be undervalued.
The Price-to-Earnings and Enterprise Value-to-Revenue ratios are relatively low. This is indicative of the company’s poor business fundamentals and lack of positive earnings. The low Enterprise Value-to-Revenue multiples also align with the company’s lackluster revenue growth outlook.
The Enterprise Value-to-EBITDA ratio is also a metric that indicates that the stock is undervalued. The Enterprise Value-to-EBITDA of ContextLogic is 1.5, which is well below the average of 31 of its consumer discretionary sector peers. The S&P 500 has a forward PE ratio of 21.3. The PS ratio of ContextLogic is 0.86, which is 75% below the average.
A key valuation metric for growth stocks is the price-to-sales ratio. Generally, the higher the growth rate, the higher the price-to-sales ratio should be.
ContextLogic’s dependence on Chinese sellers should limit its total addressable market
Despite being the parent company of discount eCommerce website Wish, ContextLogic is not the first or last company to claim to have the monopoly on delivering a stellar online shopping experience. While it might be a cliche, the fact is that many of the top retail players in the space sell their goods from China. That said, ContextLogic’s stock may not be in the same league as its Amazon (AMZ) counterpart.
For starters, ContextLogic’s stock has underperformed by over 10 percent since its initial public offering in 2021. That may be due to the fact that the company has been unable to earn a profit for the last four years. On the other hand, the company has a healthy amount of cash on its books. Fortunately, its chief executive officer resigned after only seven months on the job.
It is unclear whether the aforementioned CEO took the high road or the low road to the corporate equivalent of heaven. But while it is difficult to say for certain, it is safe to assume that ContextLogic’s stock is destined to be on Wall Street for some time to come.
ContextLogic beats the stock market by over 3X
Despite the hefty price tag and less than stellar growth, ContextLogic (WISH) is still worth a look. The company’s awe-inspiring marketing and sales tack ons, combined with a solid capital allocation, should keep the company’s top line in the black. Having said that, the company has a ways to go before it can be labeled a success story. Hence, the best strategy would be to buy the stock while it’s still cheap. Currently, ContextLogic’s market cap is estimated to be around $4 billion. In 2020, the company’s top line was just over $2.54 billion. In 2023, ContextLogic is expected to post sales of over $4.49 billion.
Having said that, the company’s stock has a ways to go, which is best exemplified by the company’s $1.6 billion cash balance. A savvy investor could take advantage of the company’s financial clout by using the money to reinvest in a nascent technology or two.
ContextLogic’s performance during the COVID crisis
During the COVID crisis, ContextLogic (WISH) gained a lot of attention as a meme stock craze. However, the company is not able to sustain growth in the post-pandemic scenario. The company has faced a number of problems due to its weak business fundamentals and governance issues. In addition, the company is facing shareholder derivative lawsuits. The company has also lost 97% of its value since it was at its peak in late January 2021.
In March 2020, the World Health Organization announced the COVID-19 pandemic. Many countries imposed unprecedented restrictions on travel and business operations. This caused a significant decrease in economic activity and business closures in affected nations. The resulting impact on the business of ContextLogic was not expected to be favorable.
The stock price of ContextLogic plummeted a whopping 97% in just a few months from its peak. The company’s net losses reached $272 million in the last twelve months. This was mainly because of increased charges for consumers and poor performance by the company’s merchants. In addition, the company’s shipping partner, PostNord, halted deliveries of packages from outside the EU. This led to an 80% decline in Q2 sales.