Wish Wants $1 Billion IPO At Stellar Valuation

Quick Take

Wish (ContextLogic) (WISH) has filed to raise approximately $1 billion in an IPO of its Class A common stock, according to an S-1 registration statement.

The firm has developed a mobile-first ecommerce platform for consumers and merchants in China, North America and in other regions.

WISH has produced impressive revenue growth and has a strong industry outlook in its favor.

However, the IPO appears extremely expensive, so I'll watch the IPO from the sidelines.

Company & Technology

San Francisco, California-based Wish was founded to empower merchants to effectively engage with prospective customers via the firm's mobile ecommerce platform.

Management is headed by founder, Chairman and CEO Peter Szulczewski, who was previously in various roles at Google

The company’s primary offerings include:

• Sell on Wish

• Wish Local

• Wish App

Wish has received at least $1.5 billion from investors including DST Global, The Founders Fund, Formation8 Partners, GGV Capital and Republic Technologies.

Customer/User Acquisition

Wish acquires users through major mobile app downloads and online marketing.

The firm has over 100 million monthly active users [MAUs] in over 100 countries with more than 500,000 merchants selling 150 million SKUs.

Sales and Marketing expenses as a percentage of total revenue have been dropping as revenues have increased as revenues have increased, as the figures below indicate:

Source: Company registration statement

The Sales and Marketing efficiency rate, defined as how many dollars of additional new revenue are generated by each dollar of Sales and Marketing spend, has risen markedly to 0.4x in the most recent reporting period, as shown in the table below:

Source: Company registration statement

Market & Competition

According to a 2020 market research report by Tenba Group, the Chinese e-commerce market was an estimated $1.94 trillion in 2019.

That amount represents a 27% year over year growth rate and 25% of the country's total retail sales volume.

The report estimates growth in e-commerce in China in 2020 as a result of the Covid-19 pandemic and a shift in consumer behavior toward more online purchasing.

Also, mobile commerce generates the strong majority of e-commerce sales, with 80% of e-commerce activity coming from smartphones. The global average is 64%, per the report.

Major competitive or other industry participants include:

• Amazon (AMZN)

• Alibaba (BABA)

• Shopify (SHOP)

• Walmart (WMT)

• Target (TGT)

• JD.com (JD)

• Dollar General

• TJ Maxx

• Others

Financial Performance

Wish’s recent financial results can be summarized as follows:

• Growing topline revenue

• Increased gross profit but reduced gross margin

• High and uneven operating losses

• A swing to cash flow from operations

Below are relevant financial results derived from the firm’s registration statement:

Source: Company registration statement

As of September 30, 2020, Wish had $1.1 billion in cash and $1.4 billion in total liabilities.

Free cash flow during the twelve months ended September 30, 2020, was $2 million.

IPO Details

Wish intends to raise $1 billion in gross proceeds from an IPO of 46 million shares of its Class A common stock, offered at a proposed midpoint price of $23.00 per share.

Class A common stockholders will be entitled to one vote per share versus 20 votes per share for Class B shareholders.

The S&P 500 Index no longer admits firms with multiple classes of stock into its index.

No existing shareholders have indicated an interest to purchase shares at the IPO price.

Assuming a successful IPO, the company’s enterprise value at IPO would approximate $13.9 billion, excluding the effects of underwriter over-allotment options.

Excluding effects of underwriter options and private placement shares or restricted stock, if any, the float to outstanding shares ratio will be approximately 7.84%.

Management says it will use the net proceeds from the IPO as follows:

We currently intend to use the net proceeds received by us from this offering for working capital, operating expenses, sales and marketing expenses to fund the growth of our business, and capital expenditures. In addition, we may use a portion of the net proceeds to acquire complementary businesses, products, services, or technologies. However, we have no current understandings, agreements or commitments for any specific material acquisitions at this time.

Management’s presentation of the company roadshow is available here.

Listed bookrunners of the IPO are Goldman Sachs, J.P. Morgan, BofA Securities, Citigroup, Deutsche Bank Securities, UBS Investment Bank, RBC Capital Markets, Credit Suisse, Cowen, Oppenheimer & Co., Stifel, William Blair, Academy Securities, Loop Capital Markets and R. Seelaus & Co.

Commentary

Wish is seeking U.S. public investment to fund its ambitious growth initiatives and in the wake of a sharp increase in revenue propelled by increased online buying as a result of the Covid-19 pandemic.

The firm’s financials show accelerating topline revenue growth along with gross profit growth.

Monthly Active User [MAU] growth has been impressive. In 2015 the firm had 21 million MAUs and for the nine months ended September 30, 2020, it had 108 million, with an annual run rate in 2020 of 144 million, a nearly 7x multiple of 2015’s MAU figures.

Sales and Marketing expenses as a percentage of total revenue have been dropping as revenues have increased; its Sales and Marketing efficiency rate has also increased markedly in the most recent reporting period. Both figures suggest increasing capital efficiencies in its marketing efforts.

The market opportunity for providing merchants with a mobile-first platform to sell to consumers is large and the firm’s global orientation is impressive.

As to valuation, compared to JD.com, WISH is seeking a significantly higher valuation at IPO for its revenue multiples, while generating approximately the same topline revenue growth rate.

I use JD as a comparable since most of Wish’ merchants are based in China, although the firm has merchants in other countries and seeks to expand internationally.

Given the 487% EV/Revenue premium that WISH is asking IPO investors to pay versus that of JD.com, the IPO looks to be very highly priced.

For ‘risk on’ investors, WISH may represent a potential opportunity for a mobile-first e-commerce play.

However, I don’t like paying such a high premium and will put WISH on my watch list for a potentially lower entry point later on.

Expected IPO Pricing Date: December 15, 2020.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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