ContextLogic Inc., (WISH) is an American e-commerce platform that helps merchants reach customers and allows users to customize shopping and find products. It was founded in 2010 as an app that allowed customers to make wish lists of their favorite items before pairing them with merchants. It enables sellers to list their products on Wish and sell to customers directly. The company provides a tailored product feed allowing users to browse and discover things to buy by scrolling through its mobile app. It also provides a marketplace, payment processing, data insight, user-generated content production, business operations support, and logistic services. The company generates revenue in three ways:
- Core marketplace segment, where it earns commission fees when customers buy and sell products on Wish.
- Advertising revenue when merchants pay to have their products promoted to consumers in the Productboost category.
- Logistics revenue is generated when merchants pay the company to assist them with product fulfillment and delivery.
ContextLogic reported better-than-expected results for the first quarter, and the numbers were released on May 12. ContextLogic stock has surged in recent weeks as it is a trending stock on Reddit forum WallStreetBets. However, the company faces certain issues impacting its brand value.
First-quarter earnings recap
The company reported revenue of $772 million, up 75% year-over-year driven by increased marketplace and logistics revenue. Q1 core marketplace revenue increased 40% year-over-year to $477 million and logistics revenue grew 338% year-over-year to $245 million. The growth was supported by increased monetization and continued strong merchant acceptance of end-to-end shipping solutions. Further, the company reported a net loss of $128 million in the first quarter, with an adjusted EBITDA loss of $79 million. Wish Express listings increased over 400% year over year in Q1, indicating that more people will be able to obtain their orders in 5 days or less.
As merchants return to more typical advertising expenditure, ProductBoost returned to year-over-year growth with revenue of $50 million, up 14% from the previous year. According to CEO Peter Szulczewski, this pattern indicates that shops are increasing their advertising spending as the economy improves. It also demonstrates the strength of the company’s platforms as merchants benefit from higher sales, faster delivery times, and fewer refunds. The MAUs in Q1 were down 7% year over year. However, Q1 core marketplace income per active buyer increased 76% year over year. The timing of cash outflows due to shorter merchant and vendor payable terms resulted in a negative $354 million free cash flow.
Exhibit 1: Revenue and Adjusted EBITDA
Commenting on the company’s growth and 2021 outlook, CEO Peter Szulczewski said:
“Our primary focus this year is to drive efficient customer acquisition, monetization and retention. We have made great progress on our initiatives to improve user retention and increase order frequency with new and existing users. However, we strive to achieve even higher levels of engagement and retention. This year, we are focused on creating a more personalized shopping experience and diversifying our product selection. We have more high-frequency inventory on the app, including CPG items, electronics and furniture. We believe that we can drive repurchasing behavior and become the everyday e-commerce platform for the value-conscious shopper.”
Global e-commerce revenue will exceed $4.9 trillion in 2021, according to Statista. The business has been gradually gaining a foothold in the global retail market, accounting for 17.5% of global retail sales this year. E-commerce hit an all-time high of 16.4% of total worldwide retail sales in 2020 when stores were forced to close owing to pandemic-related measures. Companies shifting to the online marketplace, increase in sales of gadgets such as mobiles, laptops, and tablets are accelerating market growth.
Exhibit 2: Retail e-commerce sales growth worldwide, by region, 2020
According to a recent report by eMarketer, the industry’s growth rate will decline substantially in major regions in 2021. It is expected to decelerate to 14.3% because of recovery in brick-and-mortar stores. Growth in the United States is predicted to slow to 7.8%, while Asia-Pacific, Europe, and the Middle East are likely to rise faster. China is expected to be the largest market for the e-commerce industry this year, followed by the United States.
Even after the economy recovers from the pandemic disruption, the number of e-commerce buyers will continue to climb. The global epidemic has shifted the value of online shopping in consumer’s life. According to global web index data, 48.8% of survey respondents said that they would continue to shop online post-pandemic due to the high level of convenience associated with purchasing goods and services online.
Challenges around the company
Although the quarterly results show ContectLogic’s strong growth, certain issues are challenging the company’s business and profitability. Securities fraud charges have been brought against ContextLogic. The complaint alleges that the Company and its senior management misled investors throughout the Class Period by concealing the fact that ContextLogic’s fourth-quarter 2020 MAUs had decreased considerably and were not growing. The company’s financial prospects and business metrics were materially overstated during the IPO registration. ContextLogic concluded its first public offering in December 2020, selling 46 million shares at $24 each. Following that, on March 8, 2021, the Company released its fourth-quarter 2020 financial results, revealing that the Company’s MAUs had already decreased 10% year over year during the fourth quarter. Then, on May 12, 2021, ContextLogic announced its first-quarter 2021 financial results, revealing a 7% drop in MAUs to just 101 million. As a result, shares declined sharply to $8.11 per share on May 12, much below the $24 per share IPO price.
On the other hand, a drop in LTM buyers is a troubling sign for the company. In Q1, the number of customers who had placed an order on Wish in the previous 12 months, or LTM Buyers, fell by 7% to 61 million. Further, the company is dealing with a lot of complaints from buyers regarding counterfeit goods available on the marketplace.
ContextLogic has potential earnings power due to its unique business approach. However, the success of the company is contingent on its capacity to overcome the obstacles it is currently confronted with. E-commerce behemoths like Amazon.com, Inc (AMZN), Etsy (ETSY), and e-Bay (EBAY) compete fiercely with the company. Wish is now trading at a discount, which makes it an appealing stock, but the company is yet to demonstrate its ability to compete in the already established market and to improve its brand value.
The author does not own any shares mentioned in this article.
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