ContextLogic: Why Wish's Revenue Has Plunged Amidst Rebrand

Summary

ContextLogic, Inc. (NASDAQ:WISH), better known to investors as Wish.com, is set to report Q4 2022 earnings later this month (currently estimated to be announced on February 23rd). We'll be looking to see key updates around recent revenue trends and strategic plans for the remainder of 2023. There are a few areas of concern that I believe need to be addressed on this call because as things stand now, I remain bearish on the near-term prospects of ContextLogic for a few reasons:

1. Cost cutting is significantly impacting revenues: Through the first 9 months of 2022, revenues are down an astonishing 75% from the prior year due to reduced marketing and ad spending. This isn't sustainable in my opinion for what was previously known as a growth company.
2. Macro headwinds still lie ahead in 2023: Many e-commerce giants such as Amazon (AMZN) issued cautionary warnings around slowing demand this year. Consumer discretionary stocks such as ContextLogic could be significantly impacted.
3. Cash burn is still very high: I think this is the most legitimate concern I have right now. Shareholder dilution in the next couple of years is possible if the company is forced to raise additional cash to stay afloat.
4. Revenue sources are changing: During Q3, logistics revenue outpaced core marketplace revenue. This is concerning in my opinion because ContextLogic's logistics business operates on much lower margins.
5. Competition remains fierce: Amazon, Walmart (WMT), Target (TGT), Pinduoduo (PDD), Alibaba (BABA), and many other e-commerce companies with more resources and better scalability continue to invest in improvements to lower prices, which may challenge Wish's value-oriented strategy.

And I'm not alone in these concerns. ContextLogic's share price has plummeted more than 95% since going public a few years ago. The current operating model simply does not appear profitable. Expenses are still way too high, and now revenues are being impacted by the recent cost-cutting actions.

Since WISH stock price fell below $1, it became non-compliant with the NASDAQ listing rule which requires listed securities to maintain a minimum bid price of $1/share. On October 28th, 2022, ContextLogic received a notice letter from NASDAQ saying the company had 180 calendar days, or until April 26, 2023, to regain compliance. CFO Vivian Liu noted on the Q3 earnings call that the team was evaluating alternatives such as a reverse stock split to move shares over $1. It will be interesting to see if there is any update there.

In my opinion, major changes need to be made in order to convince Wall Street of a turnaround story. There needs to be a real tangible plan outside of the 3 Pillars and customer retention improvements, as noted by management during the Q3 earnings presentation as the biggest foundation for growth:

While there have been some notable goals achieved in the short term, investors will eventually demand more to justify buying shares. A lot of downside is currently priced into the share price.

Slowing Revenue and Macro Headwinds

When ContextLogic first went public a few years ago during the pandemic, the company was putting up impressive top-line growth numbers. Founder and former CEO Peter Szulczewski was focused on rapidly expanding during a time when online shopping was a huge focus with everyone staying at home. A lot has changed since then. Due to the excessively high cash burn from expanding too quickly, the company was forced to reduce ad spending recently, which in turn impacted revenue growth. At the same time, Wish is now forced to deal with macro headwinds as the global economy faces a recession. A lot of consumer discretionary companies focused on e-commerce are expecting challenges in 2023. For example, Amazon recently announced it secured financing in anticipation of a slowing economy. I believe Wish will also expect to face similar challenges.

Cash Burn

As I mentioned earlier, ContextLogic's current cash position and cash burn is still my biggest concern. As of September 30th, 2022, ContextLogic had cash and cash equivalents of $587 million plus an additional $250 million in marketable securities. Over the last few quarters, cash burn has been anywhere from $50 to $150 million. There needs to be some type of improvement in the next few quarters or ContextLogic may be forced to raise additional cash by either diluting shareholders or issuing debt.

To management's credit, cash burn has come down considerably. They addressed these issues through layoffs and reduced spending. However, this decision has become a double-edged sword as revenue suffers greatly when marketing spend is reduced and employee headcount goes down. It's a tough situation, to say the least, and Wall Street knows that. As shares currently trade around $0.60 at the time of writing, there isn't much optimism. The reduced spending is simply just buying the company more time for a turnaround.

Conclusion

At this time, I do not think there is any reason to believe ContextLogic will report a better 2023 revenue growth outlook than other e-commerce companies such as Amazon in my opinion. Major e-commerce companies have been giving bleak outlooks this year as rising interest rates and elevated inflation continue to impact the consumer discretionary sector. It's almost expected to see lower revenue growth as ContextLogic focuses on cutting costs. The biggest question remaining is how long can ContextLogic last before being forced to raise additional cash. Before buying ContextLogic shares, I believe investors should at least wait and get clarity from management during the Q4 earnings call later this month around what type of growth is expected for the remainder of 2023. If Amazon's 2023 outlook was any indicator, ContextLogic may underperform in the near term post-earnings.

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