ContextLogic (NASDAQ:WISH) stock hit the market via an initial public offering (IPO) in 2020. In January, it delivered nice returns for shareholders when it reached a 52-week high of $32.85 per share. But shares have since declined to their current price of $10. That’s a loss of nearly 70%.
ContextLogic is known for Wish, its U.S.-based e-commerce platform. Wish is one of the largest online marketplaces in the world. It has more than 100 million monthly active users, at least 500,000 registered merchants and more than 150 million items for sale.
WISH stock gained fame as a meme stock supported by Reddit users. The social media platform’s forum members try to make speculation look easy. They imply the “fear of missing out” (FOMO) effect and social media-fueled stock trading are quick and easy ways to invest.
The truth is far from this. Instead of following Reddit hype, investors should monitor these three financial metrics before investing in WISH stock.
Two WISH Stock Business Model Flaws
From what I can see, the Wish platform’s two biggest flaws are related to its business operations and its customer experience.
First of all, the site does not directly sell items. Rather, it serves as a platform for individuals to list their products and sell them to consumers. Wish uses third-party payment providers, does not stock products themselves and does not manage returns.
Wish has also received criticism for its business practices. The site is known for its cheap items, but sometimes the prices are too good to be true. Wish is plagued by sellers who list counterfeit or poor-quality items that can even harm consumers in some cases. Even worse, users can use the site to circumvent the law and purchase items that are illegal in their country.
The platform’s management team has taken steps to deal with these issues. They created a community of users who moderate the site by reporting unsatisfactory dealers and items. In exchange for their time and efforts, these users get access to perks such as free goods and discounts.
However, I don’t believe site moderation should rely solely on users. It should be conducted by the company. I am not excited about this business practice and hope this changes soon. But for now, the company’s moderation plan says a lot about WISH stock.
Revenue Has Grown, but Profits Elude WISH Stock
At first glance, ContextLogic’s revenue growth trend looks like a positive for WISH stock. In 2017, the company reported sales of $1.1 billion. Subsequent revenues have trended upward, reaching $1.73 billion in 2018, $1.9 billion in 2019 and $2.54 billion in 2020.
The 33.7% increase between 2019 and 2020 may be attributed to lockdowns during the Covid-19 pandemic, which have driven people to buy items online. This surge in revenue may return to normalized figures in 2021.
Looking beyond revenues, the first financial metric I am not excited about is ContextLogic’s operating income. With their business model, I would expect the company to generate positive income from its core operations. That is not the case.
The EBIT after an unusual expense has been negative since 2017. In fact, despite the boosted sales figures seen in 2020, last year’s EBIT after unusual expense was a loss of $743 million. That’s a significant jump compared to a loss of $128 million in 2019.
When a company is not making money from its core operations, that’s a huge red flag to me. It is also nearly impossible for a company in that situation to post a positive net income, and ContextLogic is no exception.
The company has reported negative net income since 2017, and its 2020 net loss totaled $745 million. For now, the business model does not deliver what matters most: profits rather than magnified sales.
How Will Wish Use its Financing Cash Flow?
When the stock went public in 2020, ContextLogic raised a net financing cash flow of $1.04 billion and saw $1.21 billion in net change of cash. That’s a huge increase compared to its 2019 net change of cash of $32 million. Of course, the IPO in 2020 had a very negative stock dilution effect for valuation purposes.
I would like to see what the company will do with the cash it raised. Will it be used for marketing purposes, or perhaps to improve Wish’s business organization? Cash by itself does not produce value. Businesses need to use it cleverly and effectively to boost their financial performance.
For now, I do not see any strong reason to buy WISH stock. I will give ContextLogic one year to see what it does with the pile of cash on its balance sheet. Afterwards, I will reevaluate its stock and see if any improvements were made in these three financial metrics.
On the date of publication, Stavros Georgiadis, CFA did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Stavros Georgiadis is a CFA charter holder, an Equity Research Analyst, and an Economist. He focuses on U.S. stocks and has his own stock market blog at thestockmarketontheinternet.com/. He has written in the past various articles for other publications and can be reached on Twitter and on LinkedIn.