ContextLogic Inc. (NASDAQ:WISH) is Fighting for a Sustainable Business

By
Goran Damchevski
Published
June 21, 2021
NasdaqGS:WISH
Source: Shutterstock

ContextLogic Inc. ( NASDAQ:WISH ) operates as a mobile ecommerce company in Europe, North America, South America, and internationally. The company controls the Wish platform that connects shoppers to merchants.

The platform itself has a long way to go before it becomes a widely adopted & serious marketplace.

From a qualitative perspective, the platform bombards buyers with referral coupons, one-time offers, loyalty programs for continuous presence of buyers and other marketing tactics.

The shopping structure leaves room for flexible pricing that shows shoppers one price on the thumbnail, with significant increases once the shopper picks the full properties for the item.

The qualitative aspects and functionalities of the platform are concerning, because it seems that management has increased the Sales and Marketing expenses of the business in the last 12 months, which are now as high as US$1.3b. Investors may be inclined to estimate that the spending in marketing will result in being a short term operating expense which will not have lasting user acquisition benefits for the platform.

For these reasons, as you will see below, analysts are skeptical and will prefer to wait for management to deliver on their promises first before making more positive estimates on the company.

Sales of US$772m came in 3.9% ahead of expectations, although statutory earnings didn't fare nearly so well, recording a loss of US$0.21, a 14% miss.

Earnings are an important time for investors, as they can track a company's performance, look at what the analysts are forecasting for next year, and see if there's been a change in sentiment towards the company.

Readers will be glad to know we've aggregated the latest forecasts to see whether the analysts have changed their mind on ContextLogic after the latest results.

View our latest analysis for ContextLogic

Nasdaq:WISH Earnings and Revenue Growth, June 2021

Taking into account the latest results, the consensus forecast from ContextLogic's ten analysts is for revenues of US$3.32b in 2021, which would reflect a notable 15% improvement in sales compared to the last 12 months.

Yet prior to the latest earnings, the analysts had been forecasting revenues of US$3.16b. So there seems to have been a moderate uplift in analyst sentiment with the latest release.

More importantly, losses are predicted to fall substantially, shrinking 82% to US$0.56. Keeping in mind that the company has quite a bit of flexibility in managing marketing expenses, we are inclined to question whether these expenses are better off being allocated elsewhere in order to provide optimal performance.

The consensus price target fell 29%, to US$18.70, suggesting that the analysts remain pessimistic on the company, despite the improved earnings and revenue outlook.

There's another way to think about price targets though, and that's to look at the range of price targets put forward by analysts, because a wide range of estimates could suggest a diverse view on possible outcomes for the business.

There are some variant perceptions on ContextLogic, with the most bullish analyst valuing it at US$24.00 and the most bearish at US$12.00 per share. This is a fairly broad spread of estimates, suggesting that analysts are forecasting a wide range of possible outcomes for the business.

We would highlight that ContextLogic's revenue growth is expected to slow, with the forecast 21% annualized growth rate until the end of 2021 being well below the historical 41% growth over the last year.

The Bottom Line

The most important thing to take away is that the analysts upgraded their revenue estimates. The average price target fell measurably, with the analysts seemingly not reassured by the latest results, leading to a lower estimate of ContextLogic's future valuation.

The rationale behind this might be the quality of the platform along with the large marketing expenses that failed to translate into lasting revenues and customer loyalty. The company is heavily raising cash from financing activities and using the capital to try boosting sales. Investors should be cautious as they have not yet shown signs of a sustainable business.

Keeping that in mind, we still think that the longer term trajectory of the business is much more important for investors to consider. We have forecasts for ContextLogic going out to 2025, and you can see them free on our platform here.

However, before you get too enthused, we've discovered 1 warning sign for ContextLogic that you should be aware of.

Simply Wall St analyst Goran Damchevski and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com

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