Is It Too Late to Buy Wish Stock?

ContextLogic (WISH 15.73%), the parent company of the e-commerce marketplace Wish, has burned a lot of investors since its IPO in December 2020.

Wish priced its IPO at $24, but it started trading at just $22.75. The stock subsequently soared to an all-time high of $31.19 last February during the meme stock rally, but it now trades at less than $2 a share.

Wish initially dazzled investors with its rapid revenue growth rates, but it lost its momentum shortly after its public debut. Investors also dumped e-commerce stocks as the pandemic-induced lockdowns ended, and rising interest rates sparked a sell-off in speculative and unprofitable companies.

Image source: Getty Images.

Those headwinds turned Wish into a penny stock, but it still looks fundamentally cheap at just over one time this year's sales. Could Wish stage a massive comeback from these depressed levels, or is it far too late to bet on a turnaround?

What happened to Wish?

Wish is an American e-commerce platform that sources most of its products from Chinese merchants. This cross-border approach enables it to sell products at lower prices than many domestic retailers.

At the time of its IPO, Wish served more than 100 million monthly active users (MAUs). But over the past year, it lost its MAUs and last-12-month (LTM) active buyers at an alarming rate:

Data source: ContextLogic.

Wish lost those shoppers as it grappled with ongoing quality control and shipping issues, which could be largely attributed to its overwhelming dependence on Chinese merchants. It was also repeatedly accused of selling dangerous, counterfeit, and illegal products, and those accusations led to its removal from France's app stores and search engines last year.

As Wish's base of active shoppers shrank, it reduced its marketing expenses to stabilize its losses. However, that strategy also reduced the visibility of its brand and narrowed its moat against Amazon's third-party sellers in China and Alibaba's AliExpress, which facilitates similar cross-border sales.

Can Wish's new CEO save the company?

The deterioration of Wish's core business led to the departure of its founder and CEO Piotr Szulczewski earlier this year. His successor, Foot Locker's former executive Vijay Talwar, has been focusing on narrowing Wish's losses to rightsize its business and improve its free cash flow.

But at the same time, Wish is trying to set aside more cash to provide subsidies for its higher-quality merchants, expand its logistics capabilities, and integrate more video capabilities (like Wish Clips) into its marketplace.

That balancing act is very difficult because Wish's revenue hasn't stopped sliding on a sequential basis yet. It's been narrowing its net and adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) losses sequentially over the past year, but its net and adjusted EBITDA margins continue to decline as its revenue plummets. 

Data source: ContextLogic.

In the second quarter, Wish expects its adjusted EBITDA loss to widen sequentially to $90 million-$100 million as it gradually ramps up its ad spending again and sells its products at even lower prices.

It didn't offer any top-line guidance, but it said its revenue in April (the first month of the second quarter) had declined about 30% compared to January -- which puts it on track for another sequential decline in the second quarter.

Can Wish survive this transformation?

Wish's free cash flow came in at negative $148 million in the first quarter, compared to negative $354 million a year earlier, and it still had $1 billion in cash, cash equivalents, and marketable securities. That's barely lower than its current market cap of $1.1 billion. Wish's low debt-to-equity ratio of 0.5 also gives it some breathing room to take on additional debt -- but it could struggle to secure attractive interest rates in this difficult market.

Wish's management is making the right moves, but it can't fix the business until it stabilizes its sequential growth in MAUs and revenue. Accomplishing that goal will be very difficult, especially since larger e-commerce leaders like Amazon and Alibaba are already struggling as supply chain and inflationary headwinds rattle their e-commerce businesses.

Wish won't go bankrupt anytime soon, and its depressed valuations should limit its downside potential. However, I wouldn't touch this stock until it shows some signs of life -- especially when shares of better-run e-commerce companies are still on sale.