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Every Dog Has It's Day & ContextLogic's (Wish) Is Coming

Psalm Chapter 119 verse 60 states, "I will hasten and not delay to obey your commands."


I often find that there are always excuses in life that tend to delay or impede progress. As a Christian, it's always easy to seek God through His word, and yet still not do the right thing. It is always reassuring from a verse the like the one above to put things into perspective - it's not complicated to hasten is synonymous with simply obeying.


For investing the word obey can be just as equally important. As a direct example, I have labored to create parameters in place to effectively manage the portfolio's holdings and assuming that these strategies are built to drive successful performance, keeping to them through challenging times is a must.


ContextLogic, Inc. (WISH), or Wish, went public late last year and quickly rose to a peak Stock Price, SP at nearly $33 per share. It is during this period that Wish was deemed an IPO dog, and added it to my IPO Dog List. Since late-January, it's been an entirely different story.

The lowest Wish has closed this year is just below $8 per share, with today's SP standing at just above $9. Reviewing Social Media posts and the chat boards, many investors are bent on the disconnect between the company's valuation, currently sporting an Enterprise Value, EV, at $3.9 billion, versus the "potential'. I quote the word potential as I don't believe that Wish will be as successful as bullish investors hope. In fact, I'm only modeling Wish to see its Gross Merchandise Volume, GMV, grow less than 17% per year over the mid-term. At best, I see Revenue growth achieving an annualized 20% growth rate during the same period towards $6.6 billion.


That may sound pretty good, but for a company trading $30 per share or higher this past January, it was only reflecting a potential investment return of 5% or so per year from that point, thus the IPO Dog List designation. The bigger issue than Wish's Revenue growth is the company's terrible Cash Burn, especially while being an asset-light based platform. Many other peers providing platform services command strong Operating Cash Flow, OCF, margins, while Wish is performing more similar to a direct-to-consumer business dependent upon inventory.


I think I'm being aggressive in modeling Wish to achieve a 10% Operating Cash Flow, OCF margin by 2025, and ascribing the company higher valuation multiples for EV/Revenue and OCF/share than Wayfair, Inc. (W), who today, is already north of Wish's mid-term potential Cash Flow. Looking at prior growth rates, and yes, this would equate to a SP in 2025 of $36 per share, perhaps $40 as a bookend. This type of potential was a serious red flag for a company already trading close to a Price Target, PT expected over the next five years.


Wish has now been sold off dramatically from January to early-June, with a short-lived pop in late-June only to return to previous lows. But with these lows, it has become an interesting short-term play. Based on my model, I believe that Wish is justifiably worth $23.50 per share per the company's 2022 financial estimates and valuation multiples. This reflects a potential 155% return.


It is to this point that I believe that Wish's dog day is coming. Investors were caught off guard regarding Wish's Cash Burn, but now the company is being punished in an extreme fashion that will at some point, lead to a strong counter move back towards the mid- to high-teens. Depending on earnings reports, broader market sentiment, among other factors, Wish could even see a return north of $20.


In the event this scenario plays out over the short-term, for investors buying at these lower levels, I believe that investors are best suited taking profits, as there are plenty of much better mid- and long-term e-commerce aggressive growth investment opportunities.

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