Risk/Reward Rating: Negative
Wish (ContextLogic), an ecommerce platform, was down 26% pre-market after reporting disappointing Q2 2021 financial results. Sales declined 6.5% versus Q2 2020 while the company’s original guidance for the quarter was for 3% growth. This is a large miss on the top line and should dent investor confidence.
More concerning is the outlook for the current quarter as management is now unable to provide a forecast. Executives did mention that through July, the first month of the third quarter, sales are tracking to be down 40% versus the disappointing Q2 numbers. If this trend continues for Q3 2021, sales will collapse 33% versus Q3 2020.
Most concerning of all is the company’s cash burn rate. Through the first six months of 2021, Wish has produced negative operating cash flow of -$558 million. As a consolation, the cash burn was reduced in Q2 to -$204 million from -$354 million in Q1. Regardless, this level of cash outflow requires particular attention be paid to the balance sheet to discern how much longer this can continue. At the end of Q2, the company had a book value of $862 million (assets – liabilities). The annualized cash burn run rate in Q2 is over $800 million suggesting that the company will have to make a major course change quickly.
It should be noted that Wish came public in December 2020 during frothy market conditions in the $20 per share area. The company has raised a significant amount of cash via the share sales. As a result, most of the company’s $1.75 billion worth of assets on its balance are cash and equivalents. This is positive for liquidity as the book value of $862 million is essentially a net cash position. On the other hand, the company has no identifiable productive assets outside of brand equity (which is unquantifiable) and may offer little hope if the trends in Q3 are any indication.
The company was founded in 2010. After a decade plus of operation, one would expect a sustainable business model to be producing increasing free cash flow rather than increasing cash outflows. The COVID lockdowns provided a burst of ecommerce activity in 2020 which boosted Wish’s sales by 33% after growing only 10% in 2019. The COVID boost looks like an anomaly as evidenced by the trends unfolding in Q3 with sales tracking to be down 33% versus 2020.
Given the company’s rapidly deteriorating sales and large losses, which are expected to continue for the foreseeable future, there are limited ways to value Wish. The best measure as things stand today is the book value of Wish’s equity as mentioned above. Based on numbers from the end of Q2, Wish is trading at 5.4x book value. It should be noted that this number is declining quarterly alongside the negative cash flow from operations. Against this fundamental backdrop, the current valuation is high relative to the book value.
Technicals
Technical backdrop: Wish stock has been locked in a downtrend for most of its short trading history and is at an all-time low of $7 pre-market. The prior all-time low was in the $7.50 area and was reached on 6-7-21. The stock was repeatedly rejected at the 50-day moving average (brown line on the daily chart) since the first week of July highlighting the underlying technical weakness. As things stand, the technical backdrop is of limited use given the short trading history and diminished fundamentals.
Wish (ContextLogic) daily chart
Technical resistance: The prior all-time low of $7.50 is the first resistance area. This is followed by the $8.75 area which offered support on several occasions in July. The next level is the $9.40 area which was the closing price before the gap to all-time lows after hours on the Q2 2021 earnings report.
Technical support: Given the short trading history and new all-time lows, no technical support is visible. The book value was $1.38 per share at the end of Q2 and would be a logical support area given the fundamental backdrop.
Price as of report date 8-13-21: $7
Wish Investor Relations Website: Wish Investor Relations
Wish (ContextLogic) SEC Filings
All data in this report is compiled from the Wish (ContextLogic) investor relations website and SEC filings, and where applicable publicly available information regarding consensus earnings estimates.