Time to Buy Wix.com?

After the tech selloff that has occurred over the last several months, oversold deals throughout the tech sector are on offer. One of the stocks that stands out in this area is Wix.com (NASDAQ:WIX). 

 

Wix is a technology company specializing in cloud services. Its main product is a web development tool meant to help users with minimal technical skills construct functional sites.

 

In addition to this low-code option, Wix also offers Wix Code. This platform supports web development for more highly skilled users.

 

Wix offers a variety of services for site owners and webmasters, including domain hosting, marketing tools and workflow applications. Wix operates on a freemium model in which users can pay for access to more advanced tools and features.

 

On the surface, Wix looks like a questionable stock due to losing 75 percent of its value over the last year. That selloff, however, may have made it a good candidate for investors looking for discounted growth stocks.

 

Since 2016, the company has maintained a compounded annual growth rate of 34 percent. As a result, Wix may be a sold-off growth stock that could produce generous future returns.

Wix has also benefited enormously from the shift to online business that accelerated over the past couple of years.

 

In 2019, the company had 120 million users worldwide. By 2021, that number had increased to more than 180 million. Beyond individual users, Wix is beginning to attract web development agencies that use more of its premiums tools and services. This growth among agency users is a major contributing factor in the company’s ongoing revenue growth.

 

Wix has invested heavily in building out tools for traditional businesses having to navigate the online world for the first time. In the Q3 earnings call, Wix management specifically touched on restaurants, gyms and events companies as growing parts of its customer base.

 

Companies in these verticals that started their sites with Wix and don’t have extensive technical expertise will likely stick with the company for their hosting and web development needs. Wix has also constructed scheduling, workflow and marketing tools for these businesses, practically ensuring loyalty among this newfound user base.

 

Wix also has a huge pool of users who are not yet paying customers. Only about 6 million Wix users currently pay for its premium services. As it builds new tools and offers more services, Wix should be able to convert more of its users as part of its freemium business model. Progress in this area will allow Wix to keep a steady pace of revenue growth for years to come.

A final argument in favor of buying Wix while the price remains low is that the company has a clear path toward generating free cash flow from its revenues.

 

By 2023, Wix expects to have an FCF margin of 10 percent. That target grows to 20 percent on a longer-term basis. This combination of good growth prospects and a clear plan to free up cash flow over the next year could put Wix in a much stronger position and increase its valuation substantially.

 

According to the company’s Q3 2021 earnings results, Wix brought in $321 million in revenue. That amount represented a 26 percent increase from the previous year.

 

Revenue from business solutions grew even more markedly at 55 percent year-on-year. GAAP gross margin was 62 percent.

Despite still losing money, Wix has also delivered a series of beats in earnings per share.

 

For Q3, the consensus estimate suggested the company would lose $1.33 per share, compared to an actual loss of just $0.21. The recently released Q4 earnings showed a loss of $0.37 per share against an estimate of $1.35.

 

This habit of beating EPS estimates bodes well for Wix, especially considering how poorly the stock itself has performed over the last year.

 

There are 19 current analyst ratings for Wix. 12 of these are buys, and the rest are holds.

 

Target prices, however, vary drastically among analyst forecasts. The average 12-month target price for Wix stands at $191.28, with the lowest target at $85 and the highest at $375.

 

If Wix hits its average target price, the stock would have a 12-month upside of over 140 percent against its current price of $79.61.

 

Even if it underperforms that target by a considerable margin, though, the stock still has ample room to produce a good return. It’s also worth noting that even the least positive price target would still put the stock’s price above its current level, albeit by a much smaller margin.

 

Of course, there’s no way to argue that a stock that has lost 75 percent of its value in the last 12 months is a low-risk investment. Despite good long-term prospects, the market has not been kind to Wix. While an eventual recovery seems very likely as the company continues to grow, it’s difficult to say exactly when that recovery would take place.

 

Wix also trades at a fairly high price, even after the selloff of the past year. With a price-to-book of 30.98, Wix is still no huge bargain. With that said, the argument for Wix is predicated on substantial future growth that will likely bring its price multiples down into a more sensible range.

 

A final risk factor to consider is the possibility that Wix will fail to capitalize on its large base of free users. The best source of new revenue for Wix will be conversions from free to premium users.

 

While the company has a good history of increasing its revenues by offering valuable, premium tools, many users may be reluctant to give up on free service. This could put a damper on the company’s growth, though history suggests that Wix will be able to succeed in this initiative.

 

There are several good arguments for buying Wix at the moment. With its substantial selloff over the last year, the stock has a great deal of upside potential in the event of a recovery.

 

Wix has also grown extremely well over the last several years and will likely continue to do so. With new customers, new tools and a pool of potentially lucrative clients in its free users, Wix seems to be in a very good position for the future.

 

While there are still risks associated with Wix, it seems unlikely that the losses of the last year will continue. Even if the company doesn’t see a rebound this year, its long-term prospects are quite good.

 

Overall, Wix appears to be a decent buy option for risk-tolerant investors looking for deals in the tech sector while prices are low. Wix may not maximize its upside potential this year, but over the next several years it’s very likely that the stock will produce strong returns for investors.

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