WIX - Wix.com Is Soaring: Generative AI Is A Tailwind Not A Risk - Buy This Rally

2023-08-03 13:47:24 ET

Summary

• Wix has seen a surprise acceleration in revenue growth, benefiting from generative AI and easy comparables.
• The stock is up 50% from its lows but remains far below its all-time high.
• Wix has a strong balance sheet, positive cash flow, and has generated profits on a GAAP basis.
• The stock continues to be one of the cheapest tech stocks in the sector - I reiterate my buy rating.

Wix.com ( WIX ), the website company, has been somewhat left out of the tech rally, perhaps due to fears that generative AI may pose long term threats to the business model. The recent quarter, however, showed a surprise acceleration in revenue growth as the company began lapping easy comparables and perhaps saw some benefit from generative AI on its partner business. The company has a net cash balance sheet and is suddenly generating profits even on a GAAP basis. This is a name which has underperformed for a long time and trades at compelling valuations - I reiterate my buy rating.

WIX Stock Price

WIX stock is up over 50% from its lows, but remains well off its all time high. The stock is trading at the same levels as it did five years ago.

I last covered WIX last August where I rated the stock a strong buy on account of the potential for accelerating revenue growth. The stock is up 40% since then, but given the progress towards that acceleration, I am maintaining my buy rating.

WIX Stock Key Metrics

In this past quarter, WIX delivered 13% YOY revenue growth to $390 million, coming ahead of guidance for $385 million. Management raised full-year revenue guidance to $1.558 billion, up from $1.535 billion.

WIX saw a recovery in transaction revenue growth, largely driven by higher take rates.

I was most impressed by the accelerating growth at its partners business. Recall that “partners” are customers which sell services built on Wix.

We can see that both partners and transaction revenues have accelerated on a sequential basis for two straight quarters. After many quarters featuring pandemic hangover, the bottom may be in, at least from a fundamental perspective.

What’s more, WIX continues to see slower growth in Europe and Asia. I expect both these regions to eventually recover upon any resolution of geopolitical tensions.

WIX ended the quarter with $930.4 million in cash and investments versus $568 million in convertible notes. Together with the company’s positive cash flow generation, this represents a strong balance sheet. That has enabled the company to repurchase $50 million of stock in this past quarter. Management expects to generate a 13% FCF margin this year.

It is worth noting that WIX has generated positive GAAP net income in both quarters of this year, driven both by operating leverage as well as lower sales and marketing expenses.

I remind readers that management has guided for growth to eventually accelerate to the 20% range near term with 17% long term expected top-line growth.

Is WIX Stock A Buy, Sell, or Hold?

Consensus estimates are quite skeptical regarding management’s near and long term growth targets. Consensus estimates call for modest double-digit revenue growth over the coming years.

The stock looks attractively priced even based on those estimates. Based on 30% long term net margins, 10% revenue growth (below consensus and far below management guidance), and a 1.5x price to earnings growth ratio (‘PEG ratio’), I could see WIX trading at 4.5x sales, implying substantial multiple expansion upside over the coming years.

What are the key risks? It is possible that over time, generative AI helps the competition catch up, which eventually commoditizes the service. Perhaps the important partner business becomes a headwind as these partners move towards using alternative platforms. I have noted a similar risk in my analysis of Adobe ( ADBE ). However, I argue that these two stocks are on opposite ends of the valuation spectrum, with WIX stock looking attractively priced in spite of conservative estimates and ADBE stock looking expensive in spite of aggressive estimates. At these valuations, I'd expect generative AI to be more of a tailwind as it makes it easier for partners to increase business. Just like how ADBE is seeing increased adoption due to making it easier to create "first drafts," the ability to create website templates from AI prompts may help to accelerate growth for WIX as well. Further, I find it unlikely that generative AI will be able to offer fully customizable abilities for websites, meaning that WIX will remain important to help manage the full lifecycle of websites.

The main risks for WIX thus remain competitive pressures and the potential for a tough macro environment to hold back acceleration in revenue growth. I view WIX’s cost cutting to be positive in terms of risk reduction as the company looks poised to perform solidly in many macro scenarios. I am downgrading the stock from “strong buy” to “buy” due to the lower multiple expansion potential, but I am still bullish on the stock as the price makes sense based on current growth rates, and is spectacular if anticipated acceleration does take place.

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