Wix Share Price Has Crashed 75% – Good Opportunity?
In 2021, Wix’s total revenue & bookings grew 29%, and gross profit grew 16%, while generating positive free cash flows. After the earnings release, its share price crashed 23% to $89, which was 75% lower than its peak of $362 a year ago, implying a market cap of ~$5 billion.
In this Wix update, we discuss our latest thoughts on Wix since we covered it about a year ago, as below.
The things we like about Wix’s recent operating performance – increasing net revenue retention rate, and high & improving FCF margin;
The things we don’t like about Wix’s recent activities – capital allocation choices and high share-based compensation (SBC) expenses; and
Why the current $5 billion market cap severely undervalues Wix.
We will also discuss these points in our next Multibagger Research Series Meetup, so do register now if you have not previously registered for our past sessions (registration details are in the first section on Teachable)!
1. Things we like about Wix’s recent operating performance
1a. Increasing net revenue retention rate
As we have explained in our initial analysis of Wix (in the analysis videos on Teachable), one good thing about Wix’s business is that once it acquires an user cohort, that user cohort would continue to pay fees to Wix every year, resulting in recurring (and increasing) revenue for Wix, as:
although some existing paid premium users would stop using Wix or go out of business, resulting in some volume churn, a large portion of them would continue to use and pay Wix, and there would also be existing free users who would convert to premium users and start paying Wix fees; and
some existing paid users would also increase their spending with Wix, either by upgrading to higher-priced plans with more features, by switching from the normal website plans to e-commerce plans to accept online payments, or by paying more fees on the payment transactions processed by Wix as their businesses grow.
This recurring and increasing revenue for Wix from the same user cohort is captured by the “net revenue retention” metric. In 2020 (when Wix started reporting this metric), the net revenue retention rate was 113%, and that had increased to 116% in 2021. This is good for the business, as Wix would be able to earn more revenue from the same existing users without spending much more money.
This increasing net revenue retention rate is mainly a result of Wix’s recent:
expansion of its commerce platform including Wix Payment, which is more scalable than the subscription fees, as when the users grow their business (by growing their sales volumes or increasing their prices, including passing on inflations), their payment volumes increase and Wix earn more fees on processing more volumes; and
focus on higher quality customers with higher monetisation per subscription, retention rate and lifetime values, like users who not only want a website for digital presence but also commerce capabilities, and Partners (i.e. agencies, freelancers and B2B partnerships) that build multiple websites and adopt higher priced plans (with Wix building up dedicated sales and customer support team for the Partners).
On point 1 above (on expansion of commerce platform), Wix started disclosing:
the GPV (gross payment volume) processed by Wix, which has been growing rapidly, by 78% y/y to $9.6 billion, which is 4x the 2019 level. As Wix increases the adoption of commerce plans by users and as those users scale their payment volumes, the GPV would grow, and Wix will be able to earn a higher take rate on it due to scale, resulting in higher profitability. This has already been happening, with the take rate increasing from 0.5% in 2019, to 1.0% in 2020, and to ~1.4% in 2021; and
the Transaction revenue, i.e. all revenue generated through transaction-facilitation, primarily from Wix Payments as well as Wix POS, shipping solutions and multi-channel commerce and gift card solutions. The Transaction revenue has been growing rapidly over the years, by 134% y/y to $130 million, which is ~12x the 2019 level. Although the Transaction revenue is still small at ~10% of total revenue, as it grows larger in the future, it would help more with generating recurring revenue and higher net revenue retention rate for Wix.
On point 2 above (on focusing on higher quality customers), Wix started disclosing Partners revenue, which is the revenue generated through agencies and freelancers that build sites or applications for other users as well as revenue generated through B2B partnerships, such as Vistaprint or NTT.
The Partners revenue has been growing significantly in recent years, by 75% y/y to $257 million in 2021, which is up ~200% compared to 2019. This revenue has grown to a material portion of total revenue, at 20% for 2021, or 22% for 2021 Q4. Such high Partners revenue growth is the result of the investments and hard work that Wix put into improved performance (e.g. website speed), infrastructure and support, which are setting Wix up to become the go-to platform for agencies and designers.
The initiatives above have led to Wix improving its ARPS (average revenue per subscription), which has grown by 10% annually for 2 consecutive years, indicating that Wix now has higher quality customers with higher lifetime value.
However, one point for us investors to take note is that, due to Wix’s recent focus and willingness to spend more marketing money to acquire user cohorts that have revenues more backloaded in later years, the TROI (time to return on marketing investment) would naturally take slightly longer than in the past. E.g. in the past, Wix used to target a TROI of 7-9 months, but it had become longer at slightly more than a year for the Q1 2021 cohort. Given that the revenues are more backloaded, Wix believes that over the long term, overall returns on those marketing investments would be even higher. Therefore, a slightly longer TROI compared to the past should not be a huge red flag, especially if the net revenue retention rate is holding up well.
1b. High & improving free cash flow margin
In 2021, Wix was operating at a loss, at both the operating profit level (negative $326 million) and net profit level (negative $117 million).
However, it actually generated positive free cash flows (as reported by management, which exclude the share based compensation (SBC) expenses) of:
$28 million during the year; or
$51 million (i.e. 4% of revenue) excluding the capex related to Wix’s new HQ office.
The high free cash flow conversion and generation is mainly due to Wix’s negative working capital cycle (by collecting subscription revenues one or a few years in advance) and share-based compensations being non-cash.
This is good, because although Wix is spending a lot to invest in R&D and S&M, it is still generating positive free cash flows, and can self fund those growth without having to raise more capital (e.g. in the form of equity) that could dilute existing shareholders.
In addition, Wix is expecting its reported FCF margin excluding the capex on new HQ office (which was ~4% of revenue in 2021) to improve in the next few years, slightly to 5% in 2022 and much more to 8%-10% in 2023, as it slows down the heavy investments done in the past few years and starts reaping the benefits of the operating leverage.
In particular, the management stated that “Our business has evolved tremendously over the past 3-5 years as Wix expanded into new markets, new products and new services. In order to get to where we are today, and more importantly, continue to evolve and drive profitable growth, over the last two years, we have made meaningful investments in our business across all fronts, particularly in customer care, technology infrastructure, partners and Wix Payments. These initiatives are still in their early stages of growth, and we expect more growth in the future. We estimate these incremental investments lowered our free cash flow by approximately $80 million in 2020 and $110 million in 2021. These growth investments enabled us to put in place the headcount and infrastructure needed to generate long term revenue growth. While we have begun to see the early stages of top-line growth from these initiatives, we believe there is much more to come. We do not need to invest in our new growth initiatives in 2022 or subsequent years at the same level we have the past two years. Combined with the anticipated revenue growth of these new initiatives and operating leverage, we expect FCF margins (excluding capex related to our new HQ build-out) to increase to approximately 5% of revenue in 2022 and to approximately 8-10% of revenue in 2023.” If Wix manages to achieve 10% FCF (excluding SBC) margin on revenue, using the 2021 revenue of $1.3 billion, that would translate to a “normalised” FCF (excluding SBC) amount of $130 million (noting that there is more room for improvement of that FCF margin in the future). Compared to the ~$5 billion market cap after the earnings release, that’s a ~40x normalised FCF multiple, for a company that has been growing revenue annually by >25% (42% in 2018, 26% in 2019, 30% in 2020, and 28% in 2021), and moving increasingly upmarket to target users/ business services with stronger retention, recurring cash flows and lifetime value.
On that FCF margin, the management also explained that, the targeted FCF margin in 2023 (8%-10%) is lower than in the past (of around 16%-17% in 2017-2019), because of the changing revenue mix, with more current and future revenues coming Business Solutions (like payments) which has lower margins. The management commented that “if we exclude the investments that we have made for the last 2 years or 3 years, we are certainly higher than 20% of free cash flow for the core business. And this is something that is really important to mention and very important to understand. I believe that what we have managed to do is to generate funnel and opportunity to continue with a very healthy growth. And this is why we are going to see the leverage of those expenses. And for sure, we are going to go back to the same level of free cash flow that we have been before. And I believe that we are actually going to exceed that.”
2. Things we don’t like about Wix’s recent activities
2a. Recent capital allocation activities of Wix
In 2021, Wix generated $66 million of operating cash flows. In the year, it spent:
$38 million on capex, or ~$15 million excluding the $23 million spent on the future Wix HQ office buildout;
$43 million (cash) on acquisitions (on mainly Modalyst, a marketplace and dropshipping platform); and
$200 million on buying back 0.9 million shares (~1.6% of total shares) in 2021 Q3, at an average price of $223, due to “its extreme confidence in its business and its belief that its stock price was trading below what it believed to be its intrinsic valuation”.
However, in 2021 Q4, when Wix’s share price crashed to $140+ in 2021 Q4, which was significantly below the $223 average buyback price by the company in 2021 Q3, it did not repurchase any shares, although it probably had some excess cash – At end 2021, it had ~$1.3 billion of current cash (with convertible notes with principals of $0.4 billion maturing in mid 2023, and $0.6 billion maturing in mid 2025), and it spent ~$0.3 billion a quarter on operating expenses.
With Wix’s current market cap at ~$5 billion, if it could spend say $0.5 billion to repurchase its stocks, then it could roughly buy back ~10% of its shares, which can be quite value accretive to shareholders, given the low share price relative to the intrinsic value per the management’s comments in 2021 Q3. We will continue to monitor if Wix buys back any shares in 2022 when the share price is low.
On a separate note, Wix previously chose to issue 5-year zero-coupon convertible notes in mid 2018 and 2020, for principal amounts of ~USD 443 million and USD 575 million respectively, and maturing in mid 2023 and 2025 respectively. The notes maturing in mid 2023 have an effective conversion price of USD 211 (after considering the capped calls), which is far higher than the current share price of USD 80+.
If the share price remains lower than USD 211 by mid 2023, then it’s very likely that the notes holder would not convert. If that happens, Wix just has to pay back its principal amounts, and it would have incurred zero interest expense on them for 5 years, effectively borrowing those cash for free for that period (although they incurred some costs for the capped call transactions, which translate to ~2.2% annual effective interest rate). This scenario would be a good situation for Wix’s shareholders, as a ~6% share dilution from the conversion would have been avoided.
2b. High share-based compensation (SBC) expenses
In our initial analysis, we have highlighted Wix’s high SBC expenses, of ~$150 million, or ~15% of revenue, in 2020, which could result in dilution for existing shareholders.
In 2021, the SBC expenses grew even higher, by 50% to $221 million (faster than the revenue growth rate of 29%), or 17.4% of revenue.
This 17.4% of SBC as a % of revenue for Wix looks especially high when compared to its competitors – Shopify (7.2%), Squarespace (5.0% in 2020), and GoDaddy (5.4%). These competitors’ SBC had never exceeded 10% of revenue in the past 5 years (2017-2021).
If Wix continues to issue lots of equity options to employees (mainly to those in R&D and G&A teams now), then the share count could increase materially in the future, thereby diluting existing shareholders.
In addition, with Wix’s share price crashing, Wix might have to issue more shares to employees for them to feel as well compensated, therefore potentially resulting in more share dilution.
We will continue to monitor the SBC expenses and share dilution going forward.
3. Why a $5 billion market cap severely undervalues Wix
In the past year, Wix share price had crashed by ~75% from its peak a year ago to <$90 now, implying a market cap of ~$5.1 billion
The question is, is Wix worth only $5.1 billion now? Let’s do some high level simple calculations to see how much is Wix’s existing user cohort worth.
As we already know, Wix’s user cohorts have a high net revenue retention rate (of 116% in 2021), and Wix has been estimating the amount of bookings that it can collect from the existing user cohorts over the next ~10 years (if it does not spend any single dollar more to acquire new users).
In 2021, Wix is expecting to collect $15.7 billion worth of bookings over the next 10 years from its existing user cohorts, which is a 22% increase from the $12.9 billion a year ago, because of a larger user cohort that is of higher quality (with higher recurring revenue, retention and lifetime value) now.
This $15.7 billion future bookings from existing cohorts implies an average net revenue retention rate of 101.8% over the next 10 years, off the $1.4 billion actual bookings in 2021, per the calculations below. This 101.8% net revenue retention rate is actually lower than the actual 116% in 2021 (or 113% in 2020). This is not surprising, as right now there are still many Wix users that are just starting to adopt Wix Payments and commerce etc, so that helps a lot with net revenue retention rate. However, as the user cohorts mature, the impact from non-commerce users converting into commerce users would become less. On the other hand, an increasing number of Partners (which Wix is focusing on) could help to sustain a high net revenue retention rate sustainably in the future. Overall, these thinkings show that the $15.7 billion future 10-year bookings from existing cohorts as estimated by the management is not unreasonable, particularly when the net revenue retention rate assumed is lower than the actual rates in the past two years.
Now, let’s think about how much is this $15.7 billion sort of bookings over the next 10 years worth to Wix’s shareholders in today’s terms.
Now, let’s do some simple calculations, assuming that:
the annual booking would gradually increase over the 10 years, with the year 10 booking at 140% of that for year 1 (& with the booking totalling $15.7 billion for the 10 years), as commerce users and Partners increasingly increase their spending with Wix over the years; and
the bookings come with a gross profit margin of 61.5% (i.e. the actual in 2021).
Then, we get a gross profit of $0.8 billion in year 1 (i.e. year 2022), increasing to $1.1 billion in year 10 (i.e. year 2031). If we use a discount rate of 15% (i.e. an assumed annual return for the investors) to discount those gross profits, they translate to a value of $5.0 billion in today’s terms, which is close to Wix’s $5.1 billion market cap after the earnings release!
In other words, if Wix stops accepting new users today (which is a ridiculous assumption), spends only costs of sales to maintain its business from existing users, and completely closes down its business after 10 years (even if there would be many users who would still want to pay and use Wix then), Wix would be roughly worth $5.0 billion with the investors getting a 15% annual return (or $4.2 billion if you demand a higher 20% discount rate, to account for the uncertainty that the estimated future bookings might not be fully realised). And the market cap now is close to that!
Now, you might argue that the GPM might decline, or that some operating expenses would be needed to continue running the business, which is true, but these are just simple calculations to give you a rough idea of what the current market cap is pricing in now (and well, if Wix manages to grow its value by continuing to remain open business and expand, then its value would be (much) higher, and you basically get those for free!).
And we will leave it to you to decide if the current share price is undervaluing, reasonably valuing, or overvaluing this high quality business that is highly free cash flow generative with a high 116% net retention rate, that has been continuously expanding and gaining market share in this massive $185 billion market with strong tailwind (as businesses increasingly develop their online (commerce) presence in the long term), with increasingly more higher quality users with stronger retention and lifetime values.
For our in-depth analysis of Wix (including its valuation) and other high quality companies, check them out at our Multibagger Research Series (linked below).
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For our summary analysis of Wix, check out the video below.
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