Last week, Wix.com Ltd. (WIX, Financial) announced that it had received approval from the court for its proposal to increase the maximum amount of its share repurchase plan from $80 million to $100 million. The right to repurchase also got an extension to June 30, 2019, following the expiry of the previous schedule on Dec. 31, 2018.
The company’s shares have gained 15% since Jan. 3 with investors moving in to act on the good news released a day before, via an SEC filing. This week analysts from Wedbush issued an investor note raising their price target to $130.00, which based on the current share price of about $100 would imply a 30% upside. Citigroup also started coverage with an outperform rating.
However, that’s not the real force behind Wix’s compelling outlook for the near-term future. First, Wix is technically the only one of its kind that is publicly listed in the U.S. Shopify Inc. (SHOP, Financial) is a close comparison but not like-for-like because of the diversity Wix offers to developers and online store owners.
Therefore, given the projected growth of the e-commerce space, Wix’s disruptive website building technology that has seen some rivals try to adapt to, and the general expectation that the U.S. stock market is due a rebound in 2019, all these make the company an exciting prospect to growth investors this year.
Wix has a disruptive website development tech, but rivals are right on its heels
This cloud-based web development platform from Israel has revolutionized the e-commerce marketplace with its drag-and-drop website creation tools. It allows businesses to take their brands and products online with ease and this concept is expected to drive the growth of the company exponentially. The internet space provides enterprises with multiple investment opportunities and this has excited startups to launch shoulder services that will help to expand this growth. From, digital advertising services to Virtual Private Servers. According to this VPN unlimited review, even the smallest enterprises are opting for virtual private servers for their websites in a bid to ensuring uptime as much as possible. The internet boom may just be getting to second gear as emerging markets provide growth.
The developed world has a majority of businesses already well represented in various online platforms. However, the emerging markets and especially in the developing countries where the shift to online marketplaces is still in the early stages, the opportunity to grow is enormous. Nonetheless, one of the main challenges of this exciting market is that there are few barriers to entry and this has seen rivals, though mostly privately held, come with their own distinct products that seek to disrupt specific markets. Some of them have options that allow users to create a free website for business, which could potentially affect Wix’s free website building package that also acts as a major avenue for customer acquisition.
Wix’s free version allows businesses to create online stores as a subdomain of Wix.com, and from here most of these free users are converted to paying customers once they choose to use a custom domain in due time. As such, with several rivals offering a similar option, this could slow its customer acquisition channels in the long-run. The company’s profitability margins are also weak, with negative operating and net profit margins in the mid-single digits. However, its massive cash flow of more than $715 million based on the most recent quarter results will provide it with the flexibility it needs to continue with the share buyback program.
Top line growth has been excellent, earnings not so much but could get better soon
Wix’s top line growth has been one of the highlights of its generally impressive performance over the last few years. The company’s revenue grew from $80 million to over $600 million from the end of 2013 to the end of 2018. And while its earnings per share have not experienced such exhilarating growth, it did seem to bounce back in 2018 and is expected to remain on an upward trajectory for the next two years.
And with a top line target of nearly $1 billion according to consensus analyst estimates, it looks like there is no slowing down for Wix. This is why this company’s recent rally has more to do with than just the recent increment in share repurchases.
The company last reported results on Nov. 13, in which it doubled its previous quarter earnings bringing the trailing 12-month earnings to a net loss per share of 58 cents. It is on course to break even at the end of this year, if it can maintain the current trend.
How does Wix’s valuation compare against its closest rival Shopify?
Both companies are not profitable at the present and are trying to break-even within the next couple of years. However, from a sales perspective, Wix looks incredibly cheaper with a price-sales ratio of 8.78x compared to Shopify’s price-sales ratio of 17.32x. The forward price-earnings ratio for Wix’s stock also appears more compelling to investors with the shares trading at 12-month forward price-earnings ratio of 67.98x compared to Shopify’s 210.46x.
And even when we factor in the projected earnings growth for the next five years. Wix still dwarfs its counterpart with a five-year PEG ratio of just 0.59x, which makes it appear incredibly cheaper compared to Shopify’s five-year PEG ratio of 5.84x.
It shows why analysts and investors are gaining optimism even as the company continues with its share buyback program through June 2019. The next few months will be very interesting for Wix and things could get even better if the growth projections are to be achieved, which could make the stock appear a lot cheaper unless a significant rally ensues.
Disclosure: I have no positions in the stocks mentioned in this article.
