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WIX.com (Nasdaq: WIX) could be a great company for the future Internet world as more and more people and businesses rely on their platform.It’s still a competitive environment, but I think this is a great business. hold for the long term.
WIX operates in a tough environment
Founded in 2006, WIX is one of the leading global web development platforms. With 215 million registered users, the company aims to maintain its current growth and create his 50% of new websites on the internet in the next 5-7 years, which will make WIX It will be the engine of the future of the Internet.
But WIX is not the only web builder. WordPress, Shopify (SHOP), Weebly and Squarespace (SQSP) are also popular platforms and growing rapidly.Many new alternatives are also rushing to this lucrative market. When it comes to market competition, WIX offers very vague terms in the 10-K.
The market for web-based website design and management software today is evolving and highly fragmented. We believe that no other provider today offers a comprehensive, customizable, and fully integrated workflow solution for creating and managing a professional digital presence that matches ours.
Other web builders are very specialized in one or two areas such as DIY template-based web design, e-commerce/merchandise, appointment scheduling, content management, and more. But no competitor has the comprehensive toolset that WIX has. WIX’s strength is the idea of a “one-stop shopping” through the breadth and integration of various web applications. WIX also embraces the concept of unstructured web building to give users more freedom. For several years now, WIX has been serving users starting new businesses (small and medium businesses) with limited digital capabilities. These customers often want the convenience and more possibilities of their website, so WIX is the perfect choice. However, his web builders specializing in Shopify and Squarespace have better and more focused solutions. Acquire e-commerce and art/photo-focused customers. Diversify or specialize? Having a hard time deciding which one is right for the web builder market?
Source: Company presentation for Q3 2021
One of my favorite WIX strategies is in verticals like stores, fitness, events, restaurants, hotels, and reservations. These options offer business-oriented solutions and deliver real value to local business owners. WIX is also able to obtain deep industry-specific knowledge of his website construction through vast amounts of user data to inform R&D and marketing decisions. For example, Wix Fit offers the ability to manage customer relationships with Wix Forums and Blogs. Launched in 2019, Wix Fit serves more than 100,000 of his fitness professionals worldwide, 44% of whom have created virtual Fit businesses. In the future, other service-oriented businesses such as construction, design and consulting should bring more opportunities for WIX.
Source: Company presentation for Q3 2021
cash rich business
Cash is the lifeblood of your business. A good cash position within a company provides that business with a lot of operational flexibility and resilience. On the surface, WIX is an unprofitable and loss-making business with negative operating margins since his IPO. However, WIX’s operational cash flow is positive and growing all the time (graph below). Because 85% of subscribers prepaid him for a period of one year or more. The increase in deferred revenue will provide WIX with sufficient cash to cover its revenue shortfall in the current accounting period. The company’s cash and short-term investments have also reached him at $1.246 billion. Considering 2B’s total assets, this is a lot of cash.
Many may be concerned about significant stock-based compensation, which is also a financial cost and leads to equity dilution. The good news is that both earnings per share and operating cash flow per share are rising faster than shares outstanding. During the pandemic, WIX accelerated his R&D investments and marketing expenses, negatively impacting cash flow. Many of his B2B partnerships are new business components that also influence the current ability to bring operational cash flow to the company. From the Q3 2021 conference call, the CEO is very confident in cash profitability and believes the decline is temporary.
Earnings and growth updates
Source: Company presentation for Q3 2021
Wix’s business is booming, with annual revenue growth of 26% and annual collection growth of 33%. Future growth prospects remain bright as the web builder market is fragmented and many market shares need to be captured. It could lead to more people creating sites). As more societies rely on the Internet in their daily lives, geographic expansion into developing countries is also likely.
Risk and assessment
As for what I don’t like, I’m concerned about the huge marketing/sales and R&D costs. They are improving, but 44% of sales and marketing revenues and 32% of R&D revenues are still too high. Warren Buffett wouldn’t like this. Because WIX has to spend a lot of money to attract customers and innovate technology. A true brand with a strong trench doesn’t require very high operating costs.
Another issue concerns WIX’s main business, which is based in the relatively small country of Israel. Their 10-K mentions significant competition for developers with the right skills. WIX is trying to sign developers in Ukraine, Lithuania and Germany, but access to talent is still limited compared to other competitors.
For Q3 2021, WIX reported an expected future collection of 15.4 billion over the next decade. Two years ago, in the fourth quarter of 2019, the figure was just 6.8 billion. The value WIX brings to the table is definitely higher than in 2019. However, the current share price is back in 2019 at the 140 level. So WIX will definitely be cheaper than before. 6.26 EV/sales ratio is similar to Squarespace and much lower than Shopify. For companies with 20% or more growth, this should be a good multiple. Over the next 10 years, if WIX continues to grow its subscription base and improve its free cash flow conversion rate, I think it’s a worthwhile stock to own.
Source: Company presentation for Q3 2021
Source: Q4 2019 company presentation
