A Member of Pat McKeough’s Inner Circle recently asked for his advice on a company that offers both free and paid cloud-based platforms for building websites.
High research and developing spending has now boosted the company’s number of premiums subscribers to 3.8 million worldwide, with 40.2% revenue growth in the most recent quarter. Still, says Pat, the company has yet to make a full-year profit and its shares trade at a very high 75.4 times its forecast earnings. That high multiple increases the risk of a sharp drop if earnings fail to expectations.
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A: Wix.com Ltd., (Symbol WIX on Nasdaq; www.wix.com), is a cloud-based web development platform, founded in 2006. It aims to let businesses and individuals create free websites and mobile sites through the use of online drag-and-drop tools. The company makes money mainly by selling premium subscription upgrades, as well as add-on services and apps that make websites easier to use. Wix is based in Israel.
The company currently has over 137 million registered users worldwide and over 3.8 million premium subscriptions. About 53% of the company’s revenue comes from North America, 26% from Europe, 13% from Asia, and 8% from Latin America.
Through Wix’s App Market, users can easily install and uninstall more than 270 different free or purchasable apps, including social media plug-ins, online marketing tools, customer management tools, and payment processing capabilities.
In June 2016, the company launched Wix Artificial Design Intelligence, or Wix ADI, which makes it easier for users to create complete, personalized websites in minutes. In July 2017, the company launched Wix Code, a new development platform that lets users build more-advanced websites and web applications.
The company also recently released Ascend by Wix. It’s an all-in-one business tool that includes 20 business management and marketing products.
Wix’s user base grew 183.3% over the five years from 2013 to 2017. That’s up from 42 million in 2013 to 119 million in 2017. Premium subscriptions grew 300.0% over the same period, from 800,000 in 2013 to 3.2 million in 2017.
As a result of that growth, revenue increased 428.7%, from $80.5 million in 2013 to $425.6 million in 2017. In 2017, there was an increase of 46.7%, from $290.1 million in 2016.
<h3>Growth Stocks: Company still lost $56.4 million despite user base growth</h3>
However, Wix is still reporting losses as the company invests in research and marketing in order to maintain its market position. Wix lost $28.7 million (or $3.33 a share) in 2013, $56.6 million ($1.49) in 2014, $51.3 million ($1.30) in 2015, $46.9 million ($1.12) in 2016, and $56.3 million ($1.24) in 2017.
In the three months ended September 30, 2018, overall revenue jumped 40.2%, to $155.6 million from $111.0 million a year earlier. The company lost $5.9 million, or $0.12 a share, compared to a loss of $14.5 million, or $0.32. However, excluding one-time items, earnings in the latest quarter jumped, to $18.8 million, or $0.39 a share, from $353,000, or $0.01.
Wix’s balance sheet is strong: Its long-term debt of $334.0 million is a low 6% of its market cap; it also holds cash of $646.4 million, or $13.36 a share.
The company operates in a highly competitive market, but it continues to spend considerable amounts on research to stay ahead of the competition: $49.4 million, or a very high 32% of sales, in the latest quarter. That spending has let it become the leading do-it-yourself website-building platform.
Most new users are drawn to Wix through referrals from other users and through its free offerings. However, Wix has demonstrated its ability to sell those users premium subscriptions and paid add-ons. In the latest quarter, registered users increased 20% from the previous year, while premium subscriptions increased 26%. Furthermore, revenue per subscription increased 11.0%, to $162 from $146 a year earlier.
The stock trades at a very high 75.4 times the forecast 2018 earnings of $1.49 a share. This introduces the risk that an earnings setback, or even a slow quarter of results, could cause the stock to drop sharply.
Recommendation in Pat’s Inner Circle: Wix is okay to hold, but only for aggressive investors.
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