Source: Wish
Wish, operated by ContextLogic Inc (WISH) is a retail e-commerce marketplace serving customers across Europe, North America, South America and more. Amid recent claims of counterfeit and unsafe products on Wish’s website, French authorities have banned the app listing on the Apple App Store (AAPL) and Google Play store (GOOG). Wish’s revenue in 2021 has declined for the first time in the past four years. Based on product analysis, we determined that the company competes in terms of cost leadership. However, the cost leadership strategy requires constant revenue growth until the company has reached profitability, and at the current stage where ContextLogic remains unprofitable, the slowdown in revenue has put this strategy at complete risk. Having identified the company’s lack of funding options, we conclude that the company’s continuing operations is highly questionable and may present a short opportunity on its stock.
Stagnating Sales Due to Unsafe and Counterfeit Products
Wish sells a variety of products mainly apparel and consumer electronics based on the list of items on their website. We have analyzed Wish’s product prices on its website with major retail e-commerce marketplaces; Amazon (AMZN) and eBay (EBAY), for apparel and consumer electronics. We compared 7 random items in the electronics and apparel sections of their websites and determined that Wish’s products were on average 52.21% lower than Amazon and 16.89% lower than eBay.
Products ($) |
Wish |
Amazon |
eBay |
Woolen Blended Trenchcoat |
15 |
21.01 |
11.49 |
2TB USB Stick |
2 |
12.69 |
4.9 |
Waterproof Bluetooth Speaker |
4.87 |
22.92 |
12.69 |
Laptop Stand |
4 |
6 |
3.23 |
Xiaomi Redmi AirDots (OTCPK:XIACF) |
6 |
19 |
9.77 |
3-piece Suit |
23 |
34 |
25 |
Cable Organiser |
1.94 |
3.29 |
1.32 |
Average |
8.12 |
16.99 |
9.77 |
Source: Wish, Amazon, eBay
According to the company’s 2020 10-K, most of its merchants are based in China. We think this is how Wish manages to obtain low pricings for its products as the CEO of e-commerce research site Marketplace Pulse highlights China’s ‘low cost of labour and lax labour requirements’.
However, its low prices come at the cost of lower customer service and product quality. Its direct deliveries from the factory to consumers do not involve any middleman and have an average delivery period of over a month compared to companies like Amazon which is having its distribution centers in the US and Europe.
Source: Reviews.io
Based on the review site, Reviews.io, the company scores only 1.5 stars out of 5 from the total of 3,580 reviews. Comparatively, its e-commerce competitors all scored higher on the same site, including Amazon at 4.5 stars, eBay at 3.5 stars and ASOS (OTCPK:ASOMF) at 3.5 stars.
With reports and claims of fake and counterfeit items sold on the platform, in 2020, the French administration began investigating Wish’s products on its platform. More recently, the authorities deemed based on their study of 140 products on Wish’s website that 45% of toys, 90% of electronic goods and 62% of cheap costume jewelry were unsafe.
Following that, the French Minister of the Economy, Finance and Recovery, Minister Delegate in charge of Small and Medium Enterprises, and Secretary of State for Transition digital and electronic communications, “ordered the main managers of search engines and mobile app stores to dereference the Wish e-commerce site and its mobile application” which included Play Store and App Store as well as other search engines in France including Bing, Qwant and Google.
We forecast the company’s sales in 2021 to drop by 5.76%, the first time in 4 years, and a huge difference from its 3-year average revenue growth of 33.54%. Wish’s inability to prevent unsafe and counterfeit products on their site had eventually resulted in it losing both merchants and monthly active users. We expect this decline to continue in the near term as the App ban could spread to other major countries in Europe and the US, increasing the negative perception of the platform even further.
We estimate that the monthly active users could continue to decrease based on the average of the -22% quarterly growth (Q2 to Q3 2021) to reach 47 mln of MAU at the end of Q4 2021.
Wish Buyers (‘mln’) |
2017 |
2018 |
2019 |
2020 |
2021F |
MAU |
75 |
82 |
90 |
107 |
47 |
Growth % |
9.33% |
9.76% |
18.89% |
-56.32% |
Source: Wish, Khaveen Investments
Failing Cost Leadership Strategy
We believe the drop in Wish’s revenue serves to highlight that the company’s strategy of cost leadership is failing to materialize. Wish’s business model is to introduce a product with cheaper prices relative to its competitors, by having direct shipping from factories to end consumers. For a company to successfully execute cost leadership strategies in its business model, it would need to achieve enormous scale, to achieve profitability. A slowdown in revenue growth puts the entire strategy at risk. As mentioned in our first point, that is exactly what has happened with Wish.
Wish Revenue ($ mln) |
2017 |
2018 |
2019 |
2020 |
2021F |
Revenue |
1,101 |
1,728 |
1,901 |
2,541 |
2,395 |
Revenue Growth % |
56.95% |
10.01% |
33.67% |
-5.76% |
Source: Wish, Khaveen Investments
Another element of the cost leadership strategy to be successful is that financial margins must improve, or at the very least be maintained. In the case of Wish, its gross margins have declined from 81.38% in 2017 to 62.73% in 2020.
Wish Gross Margins |
2017 |
2018 |
2019 |
2020 |
2021F |
Gross Margin |
81.38% |
83.91% |
76.70% |
62.73% |
63.19% |
Source: Wish, Khaveen Investments
Based on Wish’s 10-K 2020, the company mentioned the reason for the increase in COGS was due to the increased volume of logistic services provided. Its Logistics segment facilitates the process of delivery from merchants to the end consumer including shipping and allows buyers to pick up their goods locally from approximately 50,000 partnered brick-and-mortar retail stores. Given the company actually made $514 mln in revenue from its logistics segment in 2020, any attempt the company makes to downsize this segment to increase margins would also lead to a loss of up to 20.23% of its total revenue.
Revenue by Segment ($ mln) |
2020 |
% Total Revenue |
Core Marketplace |
1,827 |
71.90% |
ProductBoost |
200 |
7.87% |
Logistics |
514 |
20.23% |
Total Revenue |
2,541 |
100% |
Source: Wish, Khaveen Investments
We believe the company is failing in the execution of its cost leadership strategy. The industry dynamics existing in the internet retail market breeds heavy competition given the low barriers of entry in this industry due to the lower costs of capital to establish an online marketplace. The high competition in this market would lead to pricing wars between competitors which could potentially squeeze Wish’s already deteriorating margins. With average analyst consensus expecting another year of negative growth in 2022, it may be too late for the company to revive itself as its financial position is also at a breaking point.
Lack of Cash and Lack of Funding
Wish being still in the growth stage, has been burning cash, with its negative margins. Its negative earnings in 2020 increased in magnitude to –$745 mln, from –$129 mln the year before.
Source: Wish, Khaveen Investments
Due to the unprofitability of the company, Wish is spending more cash than it makes. Wish’s cash balance has deteriorated from $1,965 mln as of the end of 2020, to $1,070 mln as of Q3 2021. With an average analyst consensus of a -13.20% decrease in revenue for 2022, the company will take another hit to its cash balance.
Ordinarily, this may not be the last straw as public-listed companies have greater access to capital markets via equity and debt funding. However, Wish’s initial public offering just took place in December 2020 to raise a total amount of $1.1 bln from the issuance of equity. Out of that, the company has already burnt through more than $800 mln of it. We believe the company would be hard-pressed to conduct another equity offering so soon.
In terms of debt funding, Wish has entered the revolving credit facility which gives them access to $280 mln, plus an additional $100 mln over the next 5 years.
Source: Wish
In any case, this credit facility involves a debt covenant of the company maintaining a minimum cash balance of $350 mln. In this case, Wish could face default if the company’s cash balance continues to decrease due to its unprofitability.
This amount is still not enough to sustain the company’s losses given its most recent 12-month loss of $872 mln. The reason for the company’s low access to funding is the low amount of assets on its balance sheet. The company operates with a 3P model without holding any inventory or owning any distribution centers. The company sources its products from third-party merchants and stores these products on its merchants’ sites. This makes the company extremely asset-light as evidenced by its net PPE amounting to only $68 mln, which is 2.68% of its 2020 revenue. While it may be beneficial to certain companies to have an asset-light model, Wish’s lack of assets limits the collateral it could provide to obtain larger loans.
With the current deterioration in earnings without further growth and alternative financing options, we believe the company’s ability to remain solvent is under serious question.
Wish Ending Cash Balance & Net Income ($ mln) |
2018 |
2019 |
2020 |
2021F |
2022F |
Ending Cash & Cash Equivalent |
712 |
744 |
1,965 |
1,130 |
831 |
Net income |
(208) |
(129) |
(745) |
(211) |
(303) |
Source: Wish, Khaveen Investments
We expect the cash position to further deteriorate through 2022. With the cash balance approaching the $350 mln debt covenant requirement, we do not see the company being able to raise additional cash to keep its operations afloat.
Risk: Business Turnaround
According to BusinessofApps, they believe Wish has taken action to tackle fake and counterfeit items by reducing the number of merchants on their platform which they estimate to have reduced from 0.9 mln in 2019 to 0.5 mln in 2020. However, the removal of merchants also led to its monthly active clients to drop as shown earlier.
Additionally, Wish has launched an initiative with Wish Standards to improve product quality. In this case, the verified sellers with authentic products could increase their exposure on the platform and increase customers’ confidence in buying Wish’s products. The upscaled product quality based on the better-quality control by the sellers could increase customer retention for the products sold on Wish’s platform. Consequently, this could stop Wish’s monthly active users from deteriorating and potentially increase its revenue on Wish’s platform. If the profitability of Wish is positively impacted by the increase of customers, Wish could then maintain its cash position for the revolving credit facility and increase its financial position in the future, differing from our projections.
Recently, a spokesperson from Wish contacted TechCrunch to explain the initiatives they have taken to limit exposure of their platform to low-quality items, as shown below:
Source: TechCrunch
While the company might be trying to turn things around, as evidenced by the initiatives it is taking, as well as the hiring of a new CEO, it might be too late based on its financial positioning.
In our view, the e-commerce market is highly competitive with a low barrier to entry. This is due to the low set-up cost associated with e-commerce sites. For example, according to Retail Dogma, the initial costs related to setting up e-commerce includes buying a domain name for $20 and site operating costs of around $5-$6 per month. Additionally, there are more than 1.3 mln e-commerce sites globally, according to Kommando Tech. We believe the high market competition presents headwinds for Wish’s turnaround.
Valuation
With the company’s revenue growth turning negative it is not appropriate to use a P/S ratio valuation, which we reserve for companies with 20%+ forward revenue growth. P/E or EV/EBITDA multiples are also not suitable to be used as the company is still heavily unprofitable with both net margins and EBITDA margins negative. This also excludes the possibility of a DCF valuation. While it may be appropriate to rely on a liquidation valuation or a fire sale valuation, we instead use selected a more conservative valuation by using an industry average P/B ratio to value the company.
We forecasted Wish’s income statement starting from its revenue based on the pro-rated 2021 revenue from Q1 to Q3 2021. We projected the 2022 revenue by referring to analysts’ consensus with a negative growth of -13.20%. We expect the cost of goods sold to maintain at 36.80%, R&D expenses at 5.08% and SG&A expenses at 62.8% of revenue. Assuming that there is no change in interest payments, we expect Wish to continue making losses of $211 mln in 2021 and $303 mln in 2022.
Wish Income Statement ($ mln) |
2021F |
2022F |
Total Revenues |
2,395 |
2,079 |
COGS |
881 |
765 |
Gross Profit |
1,513 |
1,313 |
R&D Expenses |
122 |
106 |
Selling General & Admin Expenses |
1,596 |
1,504 |
Earnings Before Interest & Taxes (EBIT) |
(204) |
(296) |
Net Interest Expenses |
6 |
6 |
Earnings Before Tax |
(210) |
(302) |
Tax |
1 |
1 |
Net Earnings |
(211) |
(303) |
Source: Wish, Khaveen Investments
With the non-profitability of Wish, we have projected the cash to decrease to $1,130 mln by year-end 2021 and $831 mln in 2022. In 2020, Wish has decreased its short-term investments by $136 mln to maintain its cash position and we expect that to maintain at $266 mln in 2021 and 2022. In terms of its equity value, we expect it to decrease to $514 mln by 2022 due to its negative retained earnings.
Wish Balance Sheet ($ mln) |
2021F |
2022F |
Assets |
||
Cash And Equivalents |
1,130 |
831 |
Accounts Receivable |
84 |
73 |
Short-Term Investments and Other Current Assets |
266 |
266 |
Total Current Assets |
1,480 |
1,169 |
Net Property, Plant & Equipment |
82 |
49 |
Other Fixed Assets |
18 |
11 |
Total Fixed Assets |
100 |
60 |
Total Assets |
1,580 |
1,229 |
Liabilities |
||
Accounts Payable |
362 |
314 |
Short-term loans |
363 |
363 |
Total Current Liabilities |
725 |
677 |
Non-Current Liabilities |
38 |
38 |
Total Liabilities |
763 |
715 |
Equity |
||
Retained Earnings |
(2,395) |
(2,697) |
Equity attributable to shareholders |
816 |
514 |
Total Equity |
816 |
514 |
Source: Wish, Khaveen Investments
To calculate the company’s value based on P/B valuation, we included other selected retail e-commerce marketplaces in the market and obtained an industry average P/B ratio of 3.00x.
Source: Seeking Alpha, Khaveen Investments
With the projected equity value and the industry average P/B of 3.00x, we obtained a value for the company at $1,538.69 mln with a target price of $2.39, indicating a downside of 23.1% in 2022.
P/B Valuation |
2021F |
2022F |
Equity Value ($ mln) |
816.43 |
513.63 |
Growth % |
-67.87% |
-37.09% |
Industry Average P/B |
3.00x |
3.00x |
Valuation ($ mln) |
2,445.80 |
1,538.69 |
Shares Outstanding (‘mln’) |
643.00 |
643.00 |
Target Price |
$2.39 |
|
Current Price |
$3.11 |
|
Downside |
-23.1% |
Source: Wish, Khaveen Investments
Furthermore, we derived additional valuations based on its liquidation value and fire sale value to compare against our P/B valuation price target. For the liquidity valuation, we obtained a forecast of its net book value excluding intangible assets at $513.63 mln or $0.80 per share.
For the fire sale valuation, we used the liquidity value and further discounted its non-monetary assets of $59.52 mln with an assumed fire-sale discount rate of 20%. This translated to a valuation of $501.72 mln or $0.78 per share.
Source: Khaveen Investments
- To take advantage of this opportunity, now would be a good time to short the WISH stock which provides a possible 23.1% gain based on it reaching its P/B value by the end of 2022.
- Investors need not exit their position until the price has reached $2.39 (P/B value), provided the company has not given any colour on additional funding options, and its FY2022 sales growth remains negative.
- Should the company file for bankruptcy over the next 12 months, investors could further hold the short position until its liquidity value of $0.80.
Verdict
The e-commerce marketplace of ContextLogic has the advantage of having relatively cheap products compared to its competitors. However, the company was impacted by claims of counterfeit and substandard product listings, leading to its first-ever annual revenue decline. We believe this has derailed its ability to successfully execute its cost leadership strategy. With the company also nowhere near profitability, its decreasing cash balance could potentially impact its ability to maintain its $350 mln revolving credit facility. Considering its IPO equity proceeds have also been mostly used up, we believe the company has a lack of funding options to keep its business afloat. While we are bullish on the Internet Retail industry and hold many stocks within the industry, we believe there is a serious doubt about ContextLogic’s going concern, and based on our P/B Valuation, we have a Sell recommendation on ContextLogic, indicating a 23.1% downside.