Summary
- Starboard Value takes a 9% position in Wix.com at approximately $70 per share.
- Starboard most likely believes that Wix is moving too slowly and Starboard will lean on their previous experience to enact necessary changes, quickly.
- Wix's Investor Day back pointed to a 20% FCF margin. Given that its current FCF margin at best points to 5% for 2022, there's a lot of room for improvement.
- Can Wix get its Rule of 40 closer to 30% in 2023? If yes, this would be nearly double the midpoint of 2022.
- By my estimates, Wix is priced at 20x next year's free cash flows. A very attractive entry point.
Investment Thesis
Wix.com ( WIX ) saw its shares move higher on Monday as investors welcomed Starboard Value, taking a 9% position in the name. Investors are looking to coattail the famous hedge fund, as the fund looks for ways to improve Wix's path to profitability.
Wix will undoubtedly assure Starboard that it's serious about its plan to improve profitability. And I'm confident that Starboard would retort that they too are serious, given that their position is bigger than the whole C-suit combined.
Presently, the stock trades for approximately 20x free cash flows. A figure that I believe is very reasonable, particularly if Wix can indeed get closer to 30% on a Rule of 40.
Revenue Growth Rates Slow Down
Wix's revenue growth rates have been coming down over time. It's now clear that the boom that took place in Covid is now long gone.
However, with the stock down approximately 70% from its highs, including the jump of 15% yesterday, I believe that this is ''known news'' already.
What's interesting here is what's next for Wix.
Activist Starboard Value Jumps Aboard
Starboard Value takes up a 9% position in the company, putting down at least $370 million to buy into the company, at what I believe to be $70 per share.
Investors clearly welcome the famous activist hedge fund and believe that Starboard will be able to lean on its skills to help Wix cut a path to profitability.
After all, Starboard has been around the block and is widely recognized as a successful activist hedge fund .
Now, let's discuss the number one objective for Wix.
Path to Profitability in Focus
At its Investor Day back in May, Wix declared that it could get its free cash flow margin to 20%. Given that in the best case, on a currency-adjusted basis its free cash flow in 2022 presently points to 5%, there's a clear gap between what Wix believes it could do and what it is actually doing. At least this year.
For their part, Starboard most likely believes that the company is moving too slowly. And that there's probably low-hanging fruit that Wix hasn't been aggressive enough to act upon.
WIX Stock Valuation - 20x 2023 Free Cash Flow
Here are some back-of-the-envelope calculations. If we assume that Wix grows its revenues in 2023 by 10%, that would put the company on a path to $1.6 billion of revenues next year.
And if assume that next year Wix succeeds in getting its free cash flow margin to 15%, that would see approximately $240 million of free cash flow in 2023.
That would put the stock priced at 20x next year's free cash flow.
Obviously, this multiple has come down significantly from where it was last year. But at the same time, there's clearly a lot of pent-up potential for Wix to improve its operations.
If over the next twelve months investors believe that Wix's 3-year plan is taking shape, there's room for its 20x free cash flow multiple to expand, particularly when Wix gets into mid-2023, investors believe that 2024 could be even better.
The Bottom Line
Throughout 2022 Wix has been busy cutting back expenses, with approximately 75% of its cost-cutting coming from reducing headcount. So it's not exactly that Starboard taking a position here is expected to materially change Wix's underlying plan. Starboard simply adds credence to the overall strategy.
As a reference point, GoDaddy ( GDDY ), Wix's larger peer, has been growing at mid-teens CAGR for a prolonged period of time, and it also has been priced at a very similar multiple to Wix.
Given that Starboard is invested in GoDaddy already, one can infer that Starboard is taking its learnings from that largely unrewarding investment and applying it to Wix. There's a lot to be optimistic about here. I'm asserting a buy rating on Wix.
For further details see:
Wix.com: Path To Profitability Is Now Serious