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1 Stock to Buy Amid This Tech Sell-Off

The Motley Fool
The Motley Fool
 2022-01-28

For investors focused solely on the broad market indexes, the last 12 months look pretty good relative to historical averages -- the S&P 500 and Dow Jones Industrial Average are both up by about 10% or more. But these two indexes alone don't paint a great picture of the experience many investors are having.

Over the last year, the small-cap growth factor has lagged the S&P 500 index by more than 30%, and roughly two-in-five companies that comprise the Nasdaq Composite are down 50% from their 52-week highs. Amid this sell-off, many promising investments are beginning to pop up, and one of those is Wix.com (NASDAQ: WIX) .

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Helping build the web

Wix is a global website design platform that allows individuals and businesses to build the internet presence they want. With its easy drag-and-drop platform, anyone can quickly design and publish a website without any need to write code or hire a developer.

Once any of Wix's more than 215 million registered users have built the website they want, they can pay Wix to publish and securely host their website for varying lengths of time. And it also offers dozens of tools that extend beyond the setup process to help businesses operate digitally. These include scheduling, shipping, analytics, payments, and plenty more.

Thanks to its comprehensive solution, Wix has quickly gained market share among content management systems. In 2017, Wix accounted for just 0.6% of the market, but today accounts for 2.9%, behind only Shopify (NYSE: SHOP) and WordPress.

Wix by the numbers

Wix separates its collections (cash collected from customers) into two segments: creative subscriptions and business solutions. Creative subscriptions refers to the cash Wix collects from its users prior to publishing their websites, whereas business-solutions collections come from additional products and services users can purchase in order to help manage their business.

Together, the two segments helped Wix generate roughly $1.4 billion in collections over the last 12 months, 34% more than the year prior. And with 77% of those collections coming from its highly sticky creative subscriptions segment, Wix is able to estimate its future revenue out many years.

In the company's latest quarterly slideshow, it estimates that over the next 10 years, it will collect more than $15 billion just from existing subscribers. While Wix's current aggregate gross margin between the two segments sits at about 62%, management expects that number to rise over time. Currently, the business solutions segment is dragging the combined figure down, but management has stated that it intends to gradually increase its take-rate on payments, which will help raise its gross margin.

But this recent growth isn't just a one-time boost due to the pandemic. Since 2016, Wix has compounded both its revenue and collections by more than 33% annually and by roughly 25% on a per-share basis. As Wix continues to increase its market share and revenue retention rate, both through additional products and price increases, investors should expect some form of continued growth for Wix.

Valuation

Often, if investors want to own a growing digital business, they have to be willing to pay up. But that doesn't seem to be the case with Wix.

Today, it trades at an enterprise value (market cap minus net cash) of $6.6 billion. That's about 4.8 times its trailing-12-month collections. Though that might look cheap just on its own, let's take it a step further to be conservative.

Currently, Wix generates 23% of its collections from its business solutions segment. Since business solutions currently have low gross margins and some of its growth may have been temporarily accelerated by the pandemic, let's ignore it for a second. If we just look at the creative subscription business, investors would be paying a little over six times trailing-12-month collections -- or 6.7 times revenue -- for a business growing 25%, with a nearly 80% gross margin, and a history of generating strong free cash flow.

Assuming Wix continues to steal market share and the shift to no-code website building persists, it's hard not to see Wix as a big winner in the coming years.

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Ryan Henderson owns Wix.com. The Motley Fool owns and recommends Shopify and Wix.com. The Motley Fool recommends Nasdaq and recommends the following options: long January 2023 $1,140 calls on Shopify and short January 2023 $1,160 calls on Shopify. The Motley Fool has a disclosure policy .

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