Talking about Wix, should start with the W(r)isks
Puns aren't illegal okay...
After reporting dissapointing results to the market, shares of Wix.com Limited (“Wix”) trade for $53, 79% below 5 years ago. At this price, Wix sells at a substantial discount to the fair value of it’s existing users, even if current elevated investment levels continue and the AI bet turns out to be mediocre. Given the incredibly low valuation for the stock, a discussion of the key risks that might make Wix a “Value Trap” seems like the most valuable single discussion when discussing the stock.
This blog post is meant to be a discussion on how I frame the key risks for Wix the business and Wix the stock. I would welcome any feedback or comment on any of the below.
The common bear case for Wix, is that AI compeditors threaten to errode it’s core business at the same time competition heats up to gain new users. However I think this angle is overblown. The core Wix business is highly durable, more than 2/3 of Wix’s revenue comes from multi-product customers who have embedded Wix into their business operations — their domain, their payment processing, their booking software. These customers don’t leave because switching is costly and likely not worth any marginal saving in spend. On average, an existing customer spends 5% more with Wix each year, allowing management to confidently forecast customer spending years in advance. This precitability allows Wix to comfortably manage it’s current debt load.
The big risk: capital (mis)allocation
The real risk to the investment is capital misallocation. Wix invests large amounts acquiring new users, if Wix over-pays for these new customers, it traps wix’s cashflows in a low-returning investment and destroys shareholder value. The price Wix is willing to invest to acquire a given cohort of users relies on internal forecasts of customer spending behaviour, profit margins and how long that customer is likely to remain with Wix. Given AI functionality has become such a large component of acquiring new customers, the behaviour of new users is naturally much harder to anticipate, and if there is a decession or high economic uncertainty that is doubly true. It is unfortunate, that Wix is stepping up it’s level of investment at the same time as the instability in the middle east, and the AI boom.
Wix’s track-record of earning a good return on acquiring new customer is mixed. Pre-2021, Wix earned very high returns, recouping their investment within 12-18 months but post 2021 cohorts have had more mixed results. I estimate that 2022 and 2024 users haven’t yet produced more income for Wix than they cost to acquire. Overpaying for users is the key risk here, and times of large technology and customer behaviour changes make this risk very high.
If Wix earns poor returns from newer customers, it doesn’t ruin the investment. They fund these investments with cashflows from existing customers and if returns are poor, management will eventually lower the investment until return is sufficient. If I saw signs managemetn maintain low-returning customer acquisition, I would consider this a significant threat to the value of the stock.
At $53 per share, Wix trades at roughly 5–6x my estimate of underlying earnings from the existing customer base alone. If Wix were priced at the same relative level as Squarespace when it was taken private in 20241 it would trade at multipules of the current price. The price is soo low, that even in a bear case, where AI disrupts the core, Base-44 underperforms, and growth slows to 5%, a reasonable return of 6% still seems plausible.
The risk in this stock is high2, I don’t anticipating making this a core position in my portfolio. However I would consider making it part of a basket of software stocks that look very cheap. Tthe asymmetry is attractive, I’m buying the existing customer annuity at a deep discount, and if Wix’s AI bet works, I make many times my money.
Thank you very much for taking the time to read my work, I really appreciate it.
All the best,
Sam
Squarespace was taken private at 7x revenue and 25x EBITDA.
There is a wide dispersion of long-term outcomes for Wix, with industry developments, AI adoption and user behaviour.