WIX - Wix's Edge: A 13x Forward Valuation Perspective

2023-12-20 03:32:31 ET

Summary

• Wix remains a volatile stock, but I argue for middle-of-the-road growth rates and profit targets to make it an attractive investment.
• Wix's near-term prospects include a versatile web development platform and recent developments in their specialized platform, Wix Studio.
• Despite intense competition, Wix is serving a growing market and has the potential for stable growth rates of 10% to 14% CAGR in 2024.

Investment Thesis

Wix.com Ltd. ( WIX ) remains a very tough holding, with prominent volatility, which I suspect would have kept many investors away from this name.

Nevertheless, as you'll read here, my bull case for this name doesn't rely on any heroics. I'm simply arguing for middle-of-the-road growth rates in 2024 and for management to reach the profit targets that it had already announced earlier in 2023.

Altogether, I make the case that this stock is seriously attractive at 13x forward free cash flows.

Rapid Recap,

Back in September, in a bullish analysis , I said,

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.

To this effect, I believe it's worthwhile noting two distinct aspects.

Firstly, I went from neutral to bullish on this stock earlier in May, since then the stock has been a strong performer, see above.

Secondly, looking ahead, according to my estimates, this stock is priced at 13x forward free cash flows, rather than 21x I previously estimated.

Wix's Near-Term Prospects

Wix is a versatile web development and hosting platform catering to individuals and small businesses, empowering them to establish and maintain an online presence. At its core, Wix provides a user-friendly web creation ecosystem, featuring tools like Wix Studio tailored for professionals, for efficient website design and development. Apart from website building, Wix offers a comprehensive suite of native Business Solutions, including e-commerce features and booking systems. Recent developments include the specialized platform, Wix Studio, designed exclusively for agencies and freelancers, aiming to simplify website creation and streamline workflow management.

During the earnings call last month, Wix's President Nir Zohar, addressed the key growth pillars outlined at the Analyst Day, and expressed confidence in the ongoing acceleration of growth in the Partners business, especially with the successful launch of Wix Studio.

With that in mind, let's discuss its financials.

Revenue Growth Rates Stabilize, What's Next?

While it's true that Wix's Q4 is up against a relatively easier comparable with the prior year, the fact remains that delivering mid-teens growth rates is nothing to sneer at.

Yes, the business faces intense competition, of that there can be no doubt. For instance, in the highly competitive landscape of website builders, Wix contends with notable rivals such as WordPress and Shopify ( SHOP ). While WordPress is renowned for its flexibility and open-source nature, attracting a vast user community, Shopify excels in e-commerce solutions, offering a comprehensive platform for online businesses.

However, the fact remains that it's evident that Wix is serving a growing market, and that even without a moat around its operations there's still plenty of juice in its tank.

Now, the big question we need to form a view on, is what sort of growth rates make sense in 2024? For my part, I suspect that around 10% to 14% seems reasonable. How did I come to this range?

Back in 2022, its comparable figures were lower, which allowed Wix's 2023 to be solid. But in 2024, its comparable figures with this year are higher, meaning that it has to deliver strong growth rates and cross a higher hurdle.

Furthermore, my line of thinking appears to be roughly the same as what analysts are expecting for 2024. Sometimes, analysts and myself have similar views on companies, while sometimes we diverge , such as with Airbnb ( ABNB ). The important matter here is to have a view, but also to be open-minded and willing to change your view as new facts come to light.

As investors, we all know different maxims about changing our minds, while in practice I've found few investors are professional enough to change their minds when facts change.

WIX Stock Valuation -- 13x Forward FCF

Wix's management maintains, as it has done so for a while, that putting aside its HQ and cash restructuring costs, the business will exit Q4 with free cash flow margins of approximately 21%.

This means that as the business enters 2024, it will be well-placed to deliver upon its medium-term target of 25% free cash flow margins in 2025.

Given that we are about to enter 2024 now, it's reasonable to start to form a view on 2025.

Accordingly, I believe that by this time next year, Wix will be on a run-rate of $450 million of free cash flow. This leaves the stock priced at 13x forward free cash flows.

For a business that's stably able to grow at about 10% to 14% CAGR, paying around 13x forward free cash flow strikes me as a very reasonable entry point.

Furthermore, according to my estimates, Wix holds about $450 million of net cash on its balance sheet, meaning that it has more than 5% of its market cap made up of cash that could return to investors at some point in the next twelve months, or at least some portion of this excess cash.

The Bottom Line

I find Wix to be a compelling investment. My bullish stance relies on realistic growth expectations for 2024 and the achievement of profit targets set earlier in 2023.

What makes this stock particularly attractive is its valuation, currently priced at 13x forward free cash flows, down from my previous estimate of 21x. This adjustment is noteworthy and positions Wix as an appealing entry point, especially considering its stable growth prospects of 10% to 14% CAGR in 2024.

Towards the back end of 2024, I expect to see a run-rate of $450 million in free cash flow and a solid net cash position, implying that its valuation is more than reasonable, making Wix an intriguing prospect for investors seeking a blend of stability and growth in the web development and hosting sector.

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