The Time Is Right to Invest in ContextLogic After Steep Drop
InvestorPlace - Stock Market News, Stock Advice & Trading Tips Declining MAUs and revenue are leading to bearish sentiment. However, if the company can address product quality issues WISH stock...
ContextLogic (NASDAQ:WISH) is an e-commerce company that owns an online e-commerce platform, Wish.com, with 90 million monthly active users. Due to the Covid-19 pandemic hit, many people were left with no other choice but to rely heavily on e-commerce companies for food and necessities—driving WISH stock up.
Once lockdown restrictions eased up in 2021, many e-commerce websites like Wish.com saw a massive decrease in monthly active users (MAU) and web traffic due to people’s lack of interest in purchasing items online after a protracted lockdown. Consequently, the stock price fell off a cliff. WISH stock is now changing hands for under $6 after debuting at an initial public offering price of $24 apiece last year.
The company was forced to cut back on advertising to adjust its business model and combat decreasing transaction volume. It’s no surprise that the global pandemic created an unnatural dependence on digital commerce to replace face-to-face transactions. This quarter, ContextLogic saw revenue and monthly active users decline year over year (YOY) by 6% and 22%, respectively. So you might be feeling a little anxious about your investment in the short term, but don’t lose hope.
Although growth is slowing, revenue and active users have grown substantially for WISH over the last five years. Bearish sentiment because of product quality issues is understandable. But these issues are addressable through a wide-ranging strategy. Plus, we are in the fourth quarter of the year. Historically, this is the best season to be a retail company. The sluggish numbers in the last quarter will give way to better ones in the forthcoming one. However, have a long-term horizon when investing in WISH stock.
Decrease in Advertising Spending Will Create Short-Term Headaches
ContextLogic operates the discovery-focused shopping app Wish, downloaded 138 million times in 2020 to rank third after Amazon (NASDAQ:AMZN) and Shopee. This shopping platform offers heavily discounted merchandise with retail values below $20 to users who download it onto their phones. The Wish app shot to the top three in download charts last year predominantly because the novel coronavirus pandemic forced many businesses to shut their doors which shifted traffic online.
The pandemic that swept through 2020 fueled the growth of ContextLogic. The company ended its fiscal year with a 107 million strong, active user base, generating $2.5 billion in revenues. By the end of the second quarter of 2021, monthly active users (MAUs) ended at 90 million, a fall of 16% since last year. The rate at which they’re declining is even higher–in Q2, it was 22%.
But the e-commerce platform is facing significant commercial challenges in the coming months as fewer buyers make purchases. The number of active buyers declined 26% year over year and now sits at 52 million; this trend will not get better anytime soon. The company is pulling back on ad spending to concentrate on operational issues. It is important to address product defects and quality issues if the company wishes to survive. However, the strategy will mean there is less money to spend on advertising. Considering this, the number of downloads will continue to hamper purchases for the foreseeable future.
Making Sense of the Numbers
The company’s revenues dropped in the second half of 2019. The reason for this can be linked back with stay-at-home restrictions, which eased last year but had an effect on their business throughout most parts or 2020s so far because it caused Contextlogics’ MAU count decrease as well.
The ContextLogic team has been working hard to improve its e-commerce platform, and they’re making progress. The logistics business is an important component of this growth because it attracted customers from other parts of the world who want access to lower prices than what you’d find in your typical mall store or on Amazon Prime Day deals; these shoppers also rely heavily upon free shipping offers made available through longer-term commitments with vendors like USPS Priority Mail Express Services which comes standard within their contracts, so there’s no need pay extra fees just for getting packages delivered more quickly!
It is not surprising that WISH’s improvement initiatives had the opposite effect they intended. The company has been investing heavily in improving delivery times, theoretically allowing them more time for customer satisfaction and retention; head-scratching management needs to go back to the drawing board with what needs changing about their services before things get worse instead of better.
The company’s balance sheet is strong, with cash, equivalents, and marketable securities valued at just over $1.6 billion. The company has recognized the need to add more globally recognized brands that users know and actively search for. I believe this move, if implemented successfully, will drive higher average order values and frequent purchases from their customers through the app.
Patience Is a Virtue With Wish Stock
Wish’s trajectory is not atypical of the wider e-commerce space. Last year was a great one for the industry. With most of the world shut down, and people hunkered down in their homes, it wasn’t surprising why Wish did very well last year. However, as things have opened up in society, investors have taken their profits and are pouring capital into recovery plays.
But the major thing you have to consider is Wish’s future. It is servicing a niche that is largely ignored by retail companies. Consumer discretionary incomes are down. The economy is roaring back to life. However, people are still struggling. Under these circumstances, Wish has an attractive business model. It is an investment that will reward you when you look back on it in a couple of years. More immediately, there is a fourth-quarter earnings report to look forward towards. That will give WISH stock a nice short-term impetus.
The long game, however, is tackling quality issues. That will require more time and effort. But once things start improving on that end, this e-commerce platform has the legs to run.
On the publication date, Faizan Farooque 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.
Faizan Farooque is a contributing author for InvestorPlace.com and numerous other financial sites. Faizan has several years of experience in analyzing the stock market and was a former data journalist at S&P Global Market Intelligence.
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