WIX - Wix.com: Attractive Valuation Amidst Uncertainties

2023-09-20 11:00:05 ET

Summary

• Despite uncertainties and competition, I'm bullish on Wix due to its attractive valuation.
• Wix has maintained a relatively stable and reasonable valuation in 2023, avoiding excessive premium pricing.
• The company is committed to improving free cash flow margins, with a 13% target for 2023 and the potential for even higher margins in 2024.

Investment Thesis

Wix.com (WIX) is a web development platform, that caters to individuals and startups, providing developer-friendly tools plus a professional workspace to allow customers to manage their online presence.

Although in the past year, its stock has moved higher, this stock has been incredibly volatile. In fact, I believe that this high level of volatility would have probably caused many shareholders to give up on this name.

Indeed, the takeaway here is that this investment thesis is not blemish-free. Indeed, there's substantial competition for its customers, which is dampening its growth rates. However, Wix maintains that it's determined to increase its free cash flow profile and therefore increase its intrinsic value.

Altogether, I believe that paying approximately 21x next year's free cash flows is a more than fair entry point.

Wix's Near-Term Prospects

Wix is a web development and hosting platform that allows individuals and small businesses to create and manage their online presence. At its core, Wix offers a user-friendly web creation ecosystem, with tools like Wix Studio tailored to professionals for seamless website design and development, backed by responsive AI technology.

Beyond website building, Wix provides a comprehensive suite of native Business Solutions, including e-commerce capabilities like Wix Stores and booking systems like Wix Bookings. With a commitment to innovation, Wix continuously enhances its platform, recently introducing AI-driven features such as the AI Site Generator and AI Assistant for Businesses.

Recent developments include the introduction of Wix Studio, a specialized web creation and development platform designed exclusively for agencies and freelancers. This platform aims to simplify website creation and streamline workflow management. Wix Studio is the culmination of insights gained from the previous launch of "Editor X," reflecting the company's drive to broaden its offerings based on the specific needs of freelancers.

In addition to Wix Studio, Wix is dedicated to advancing AI technology, evident in the introduction of the AI Site Generator and AI Assistant for Businesses. This reflects Wix's ongoing commitment to leveraging AI as a key component of its growth strategy.

With this framework in mind, let's discuss its growth rates.

Revenue Growth Rates Have Matured

In a highly competitive landscape, Wix faces the challenge of vying against similar web development and hosting platforms, think of Squarespace ( SQSP ), WordPress, or Weebly, but there are countless others too. For Wix's shareholders, the risk lies in the competition's potential to capture market share by offering very comparable services at cheaper prices.

What's more, as competitors evolve their own offerings, Wix must continuously differentiate itself through innovation to continue its revenue growth trajectory.

The point I'm making here is that when it boils down to it, Wix hasn't got much for a moat around its platform, and that's reflected in its revenue growth rates.

Free Cash Flow Margins Set to Improve

Wix has consistently maintained throughout 2023 that it would seek to improve its underlying free cash flows.

More specifically, Wix.com has as its goal to enhance its free cash flow margin profile so that it can exit 2023 with 13% free cash flow margins.

This strong focus on improving cash flow efficiency reflects the company's commitment to delivering value to its shareholders. If Wix successfully achieves this target in 2023, it opens up the possibility of even more attractive returns in 2024, with the potential for investors to enjoy as much as a 14%-15% free cash flow margin. This concerted effort to boost free cash flow underscores Wix's dedication to its financial performance.

A noteworthy aspect of Wix's evolving free cash flow margin is the substantial role played by stock-based compensation in its free cash flow. The company's outlook for free cash flow in 2023, excluding HQ and cash restructuring costs, demonstrates a robust trajectory, with expectations set at $200 - $210 million, equivalent to 13% of revenue. This projection also includes an exit rate of approximately 15%, signifying the company's commitment to generating strong cash flows.

On the other hand, it's important to note, however, that a significant portion of this free cash flow is composed of stock-based compensation, which is anticipated to come in at around 14% of revenue for the year. This trend suggests that while Wix.com aims to boost its free cash flow margin, stock-based compensation remains a prominent component of its financial structure.

So, shareholders are left with a somewhat mixed bag. Yes, Wix's free cash flow is undoubtedly showing signs of improvement, but at the same time, Wix is asking investors to exercise a lot of patience.

The company's efforts to enhance free cash flow margins and overall financial performance are commendable. However, its quest to reach the coveted "Rule of 40," is still a long time away, with this goal not expected to be reached before 2025. In a market that's plagued with short-termism, when investors rarely have the stamina to wait 90 days, asking them to wait nearly a year and a half, seems to be a tall order.

On the other hand, I have to say, that in contrast to many SaaS companies, Wix's valuation multiple hasn't seen significant expansion in 2023, see above.

This distinction is noteworthy because it indicates that investors are not being asked to pay a premium for what may be perceived as an exceptionally compelling narrative.

On the contrary, Wix's valuation appears to have remained relatively stable and reasonable throughout the year. This suggests that the company's stock price is not being driven up artificially, and investors are not being asked to overpay for its prospects.

The Bottom Line

Despite the considerable uncertainties and competitive challenges faced by Wix.com in the web development and hosting sector, I remain bullish on this stock.

The primary reason for my optimism is the attractive valuation it currently offers. While the stock has experienced notable volatility over the past year, it has not seen significant multiple expansion in 2023, indicating that investors are not being asked to pay a premium for the company's growth narrative.

Furthermore, Wix's commitment to improving its free cash flow margins and financial performance is commendable, as it seeks to enhance shareholder value. The company's goal to reach a 13% free cash flow margin in 2023 opens up the possibility of more attractive returns in 2024, potentially reaching a 14%-15% free cash flow margin.

While achieving this target may require patience, it underscores Wix's dedication to financial efficiency. Although the competitive landscape poses challenges and revenue growth rates have matured, the company's valuation, coupled with its strategic focus on financial performance, makes me optimistic about its long-term prospects.

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