ContextLogic Reduces Losses Amid Intense Competition (Rating Downgrade)

A Fast Take On ContextLogic

ContextLogic Inc. (NASDAQ:WISH) reported its Q3 2023 monetary outcomes on November 7, 2023, beating income however lacking consensus earnings estimates.

The agency has created a mobile-centric ecommerce platform for shoppers and retailers primarily in China, North America and Europe.

I beforehand wrote about WISH with a Maintain outlook in early 2022 on the agency’s efforts to show the corporate’s poor efficiency round.

Whereas the agency has applied vital price reductions, it faces excessive competitors from market gamers spending to realize customers, and the Board has initiated a course of to pursue strategic choices, together with a sale of the corporate.

Regardless of its diminished losses and given its income decline, my outlook on WISH is to Promote.

ContextLogic Overview And Market

California-based ContextLogic permits retailers to successfully have interaction with potential prospects by way of the agency’s cellular ecommerce platform.

Administration is headed by CEO Joe Yan, who has been with the agency since September 2022 and is an working companion at enterprise capital agency GGV Capital.

The corporate’s main choices embrace:

• Promote on Want

• Want Native

• Want App.

In keeping with a 2023 market research report by Tenba Group, the Chinese language e-commerce market is anticipated to achieve a worth of $2 trillion by the tip of 2025.

If achieved, that might be the results of a median development price of round 6% in recent times.

The report estimates development in e-commerce in China by 2025 on account of the pandemic and a shift in shopper habits towards extra on-line buying.

Additionally, social commerce is anticipated to develop considerably because of the vast penetration of smartphones and consumer interactions with one another to attain price financial savings.

The corporate can be energetic in main world markets in North America and Europe.

Main aggressive or different trade individuals embrace:

• Amazon
• Alibaba
• JD.com
• Xiaohongshu [Red]
• Walmart
• Goal
• Others.

ContextLogic’s Current Monetary Developments

Complete income by quarter (blue columns) has continued to shrink quickly as a consequence of lowered promoting spending; Working revenue by quarter (crimson line) has remained closely detrimental due to the necessity to retain headcount to enhance its app and proceed constructing partnerships.

Gross revenue margin by quarter (inexperienced line) has risen in the newest quarter on account of larger fee charges, extra price financial savings and better logistics margin; Promoting and G&A bills as a share of whole income by quarter (amber line) have been excessive and unstable as a consequence of a decrease worker headcount:

Earnings per share (Diluted) have remained closely detrimental, though they’ve come off their worst lows of the previous few years:

(All information within the above charts is GAAP.)

Previously 12 months, WISH’s inventory worth has fallen 71.2%:

For stability sheet outcomes, the agency ended the quarter with $445.0 million in money, equivalents and short-term investments and no debt.

Over the trailing twelve months, free money used was a whopping $378.0 million, throughout which capital expenditures had been $3.0 million. The corporate paid $78.0 million in stock-based compensation within the final 4 quarters.

Valuation And Different Metrics For ContextLogic

Beneath is a desk of related capitalization and valuation figures for the corporate:

Click on to enlarge

(Supply – In search of Alpha.)

WISH’s most up-to-date unadjusted Rule of 40 calculation was detrimental (169.9%) as of Q3 2023’s outcomes, so the agency has carried out very poorly on this regard, per the desk under:

Click on to enlarge

(Supply – In search of Alpha.)

Commentary On ContextLogic

In its final earnings name (Supply – In search of Alpha), protecting Q3 2023’s outcomes, administration’s ready remarks highlighted the Board’s resolution to begin an exploration of strategic choices, hiring JPMorgan to seemingly search a purchaser for the agency’s belongings.

Income dropped as a consequence of decrease promoting spending at the same time as the corporate gained numerous partnerships designed to assist enhance its supply comfort and broaden its exercise in Europe.

Administration’s workforce discount was accomplished by the tip of the quarter and the agency expects to attain annual financial savings of $44.5 million on the midpoint.

I ready a chart displaying the frequency of assorted key phrases and phrases utilized by administration and analysts on the convention name:

The chart illustrates numerous detrimental phrases, most notably the “macro” challenges and headwinds it has been dealing with.

Analysts questioned the management about aggressive pressures and the macroeconomic atmosphere main into the This fall vacation season.

Administration replied that the corporate faces intense competitors as market individuals supply deep reductions to realize new customers, so the corporate is concentrated on sustainable development and rising common transaction worth.

Management didn’t characterize the primary month of the This fall vacation season apart from to say that for its “Each Day is Black Friday” marketing campaign, the “momentum is fairly sturdy.”

For the quarter’s outcomes, whole income dropped 52% year-over-year and gross revenue margin fell by 2.2%.

Promoting and G&A bills as a share of income dropped by 7.7% YoY, whereas working losses had been diminished by 44.5% however remained extraordinarily excessive at $71.0 million for the quarter.

The corporate’s monetary place shouldn’t be good, with loads of money, no debt, however heavy use of money up to now twelve months. The corporate has diminished its headcount to decrease its use of money.

WISH’s Rule of 40 efficiency has been very poor, indicating a mixture of sharply dropping income and excessive working losses.

Trying forward, the 2023 full-year income decline is anticipated to be 49.3% versus 2022.

A possible upside catalyst to the inventory may embrace a better-than-expect vacation season or a buyout supply.

Nonetheless, I’m not optimistic on both rely because the agency continues to face excessive competitors for customers.

My outlook on ContextLogic Inc. inventory is to Promote.