ContextLogic’s Expensive Marketing Makes Profit a Challenge
InvestorPlace - Stock Market News, Stock Advice & Trading Tips ContextLogic looks like a falling knife. Its huge marketing expenses are eating away at its profits and forcing WISH stock...
ContextLogic (NASDAQ:WISH) stock has kept falling this year, especially after its disastrous second-quarter results. WISH stock reached a recent peak on June 28 at $14.40 and has slumped to $5.18 as of Oct. 13.
In fact, as of Oct. 13, the stock is down more than 71.6% from $18.24 year-to-date. Investors just keep selling and selling.
There seems to be little that investors in ContextLogic can hang their hat on, so to speak, at least until the Q3 results come out. That likely won’t happen, though, until mid-November.
Where Things Stand With ContextLogic
As a discount e-commerce company, ContextLogic has terrible financials. In fact, ContextLogic reported that revenue fell 6% year-over-year (YOY), which is very unusual for an online e-commerce company.
I pointed out in my last article that its peers all reported significant gains in sales for Q2. This indicates an underlying problem preventing ContextLogic from attracting enough viewers to become active customers.
Moreover, its net income loss rose to $111 million from a loss of $11 million last year. In addition, adjusted EBITDA turned negative in Q2 with a loss of $67 million compared to a positive $16 million a year ago.
Its core marketplace revenue decreased 32% YOY to $378 million in Q2. However, offsetting this, logistics revenue was $228 million, a 126% YOY increase.
At this point, ContextLogic’s management seems somewhat surprised. There doesn’t appear to be a coherent plan to dig out from this situation.
ContextLogic’s Business Model Is Expensive
The issue is that ContextLogic’s business model is much different than those of its peers. Its customers are largely making impulse buys driven by the company’s algorithm of what might sell rather than a search for items they want. As a result, unlike its e-commerce peers, Context Logic has to pay huge sums on digital marketing to push out its discount products to its users.
For example, last quarter it spent $396 million on sales and marketing, which can be seen on page 10 of its shareholder letter. But this represents a huge portion, 60.4%, of its sales of $656 million. That makes it impossible to make money, since the cost of goods sold represents 41.4% of sales.
By contrast, Poshmark (NASDAQ:POSH) has a $1.9 billion market value and a lower marketing expense margin compared to WISH stock, which has a $3.25 billion market capitalization. For example, in Q2, Poshmark’s marketing expenses were just 40% of sales according to its latest earnings release.
So, in essence, the problem seems to be that ContextLogic is overspending on marketing because they think they need to. Maybe their deals just aren’t good, and bargain hunters find their discount products unappealing. That might mean it’s time to fix their algorithm, to say the least.
What to Do With WISH Stock
As a result, analysts have continued to drop their target prices. Recently, TipRanks reported that the average price target is $9.17 from Wall Street analysts. But this is down from $9.81 in early July, as I wrote in my last article on WISH stock.
Additionally, according to Seeking Alpha, 11 analysts have lowered their price target from $9.83 as of Aug. 30 to $9.25 on Oct. 12.
That makes this stock something of a falling knife. Between the continual drop in price and lowering analyst price targets, investors that put money in WISH stock keep on getting cut.
As a result, most investors might want to wait until ContextLogic can actually make significantly positive sales and healthy profits. Or, at least wait until ContextLogic’s business model is not inherently unprofitable. Investors should wait and study the Q3 results to see whether its huge marketing expenses are under control.
On the date of publication, Mark R. Hake did not hold a position, directly or indirectly, in any security mentioned in the article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
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