WISH - ContextLogic: Cash Shortage Looming - A Warning For Investors

2023-06-13 14:20:49 ET

Summary

• I have a bearish outlook on ContextLogic Inc. due to a potential cash shortage within a year, caution against investing.
• Declining active buyer and monthly active user numbers contradict ContextLogic's value proposition.
• Bleak near-term prospects for ContextLogic with little revenue growth indicated, despite some analyst predictions.
• There are doubts about the viability of ContextLogic's share repurchase program as a capital allocation strategy given estimated cash burn.

Investment Thesis

Two months ago, I said :

I believe that within 12 months, ContextLogic will be out to raise capital to shore up its balance sheet. This will mean a shareholder dilution and reverse stock split is likely to happen within a year.

Since I wrote that statement, the stock is down:

So, what's next now? I argue that this company is likely to run out of cash within a year. Investors should not seek to buy into this falling knife. The best way to compound capital is to buy into healthy and growing businesses . ContextLogic (WISH) is neither of these.

Why ContextLogic? Why Now?

ContextLogic, also known as Wish, is an ecommerce platform that provides a personalized shopping experience, connecting consumers with merchants. ContextLogic declares that through data science it can focus on user engagement, and empower merchants to leverage its network and create a large ecommerce marketplace.

Wish's value proposition to users lies in its ability to provide a selection of high-quality, discounted products. With a mobile-first personalized shopping experience, ContextLogic aims to make online purchasing exciting and interesting, similar to browsing social media.

Here's a quote from the earnings call describing how Wish sees its vision:

[...] our vision is to unlock e-commerce for the underserved by giving users access to a wide selection of affordable goods and providing merchants with success to millions of users globally and which is all about creating the fun, easy and personalized discovery shopping experience that provides the best value for our users looking for the delight in life.

Moving on, in my previous analysis, I highlighted that the core reason why I was bearish on Wish's prospect was that active buyers continue to decline from the e-commerce site.

This is what I said

[...] We hear throughout the retail space how consumers are increasingly looking for affordable bargains given the pervasive cost of living crisis.

And yet, ContextLogic's Monthly Active Users simply don't support that narrative. Further, as you see above, in 2022 MAUs were down 68% y/y.

And now? How do Wish's Monthly Active Users ("MAU") look?

Wish's Monthly Active Users are down close to 50% y/y, there is no need to overthink matters. Simply said, this business will not thrive.

Although, from day to day the share price will be prone to vicissitudes as capital flows in and out of small-cap stocks as investor risk appetite increases and decrease with time, in the medium-term this business is done.

On the other side of the argument, this is how Wish describes their progress:

[...] we continue to see improvements in customer NPS and encouraging buyer conversion and customer retention trends in Q1 versus a year ago.

In particular, payer conversion and customer retention improved by 18% and 10%, respectively, in the first quarter of 2023 when compared to the same period last year.

Essentially, Wish declares that it is making progress with its customer retention figures. Although, from the evidence I see in front of me, it appears that Wish's MAU figures are moving in the wrong direction.

Next, let's analyze Wish's near-term prospects.

Wish's Near-Term Prospects Leave A Lot To Be Desired

Even as Wish's comparables with the prior year become easier, there doesn't appear to be any light at the end of the tunnel for this company.

As it stands right now, I urge readers to consider analysts' revenue estimates for the next 3 quarters.

Analysts following the company are expecting that Wish is now facing trough revenues, and that in the next few quarters, this company will be reporting double-digit growth rates.

For my part, I struggle to see how. Even as I recognize that it's possible.

Next, let's turn our focus to the bull thesis.

The Core Of The Bull Case

A few days after I wrote my previous analysis, titled "Capital Raise on the Cards," Wish announced a massive share repurchase program .

However, I fail to believe that Wish will succeed with this capital allocation strategy. Why?

Consider the following:

The business is on a path to burn more than $300 million of free cash flow in 2023.

Given that Wish only holds $620 million of cash and equivalents on its balance sheet , the business must in the first instance stop its cash bleed. Then, grow its Monthly Active Users. And only then, once the business is proven to be stable and viable, can it consider leaning on its balance sheet to reward its shareholders.

The Bottom Line

In my analysis, I express a bearish outlook on ContextLogic, commonly known as Wish. I believe that the company is heading towards a cash shortage within a year, and I caution investors against buying its stock.

Despite Wish's claims of providing a personalized shopping experience and connecting consumers with merchants, I find that their active buyer and monthly active user numbers are declining significantly.

This contradicts the company's value proposition of offering affordable goods and an exciting online shopping experience.

Moreover, Wish's near-term prospects appear bleak, with little indication of revenue growth. Although some analysts predict double-digit growth rates for the company, I struggle to see how that would materialize.

Additionally, I have doubts about Wish's share repurchase program as a viable capital allocation strategy, considering my estimated cash burn for 2023.

Wish needs to first address its cash flow situation and focus on expanding its user base before considering rewarding shareholders.

In conclusion, I believe that ContextLogic Inc. is unlikely to succeed in the medium term and should not be considered as a favorable investment option.

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