My new position: WIX

Investment Analysis Clubs Saul’s Investing Discussions
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I’d like to introduce the newest company in my portfolio, Wix. They first piqued my interest when they grew revenue 48% for the Dec quarter…they simply hadn’t been on my radar before, even though I was a user. I actually used Wix to create a website for my fantasy football league a couple years ago. Wish I’d been paying attention to the company then!

Wix offers hosted websites for free and also sells premium sites (http://www.wix.com/upgrade/premium-plans). They have 100 million users and 2.5 million are paying (premium). Subscriptions can run for 1 year or multiple years.

The History

Wix is based in Israel. It IPO’d back in November of 2013 at $16.50/share. After a typical post-IPO spike to $30 or so, it retracted, and then languished until early 2016. Since then it has shot up and is now at $75/share. Their market cap is currently about 3.3B, so their 290M of revenue in 2016 puts the PS ratio at ~11.5.

…I never said they were cheap.

They also made a tiny acquisition in March – they bought Deviant Art for 36M in cash.
This altered their expectations for this year slightly, but I will mostly ignore it since it’s so little and I want to give the numbers they provided a few weeks earlier when they reported their 2016 results. But here’s the info on the acquisition: http://seekingalpha.com/news/3245848-wix-buys-deviantart-36m…

https://youtu.be/mqEOdmNMRmo Here’s the CEO on Cramer last Fall. I should probably just let his explanation stand, but he has a thick accent, so nah. I’ll try to analyze the company myself.

How do they make money?

Like Shopify, they have a lot of different ways they can make money.

  1. Sell ads to free-site users (and get more users) – they have over 100M users most of whom use the site for free. Ad time!

  2. Get users to sign up for premium – they’ve been getting 50 or 60 thousand to sign up each month. But overall they’ve got over 100M users and growing! 50 or 60 thousand users is just 5 or 6 hundredths of 1 percent of 100M. That’s all they need to sign up for premium each month to keep pace.

  3. Get premium users to upgrade. The average revenue per user (ARPU) is rising - up from $132/yr to $153/yr in 2016!

#1 and especially #2 and #3 act combine to create the massive revenue increase they’re expecting in 2017: 41%! However, I also believe #4 is quite possible and would result in WAY more revenue in the long run…

  1. Find new ways to monetize, like Shopify’s merchant solutions, payments, etc. As far as I can tell they haven’t even started to do this, but I would imagine it is coming. In fact, on the CC, there were several questions about this. To one of these, the CEO answered:

“…I think that the question is in not just like what else can we do? The question is what can we not do – because there are so many opportunities.”

They have an ecommerce solution already, so there should be other ways to monetize that than just subscription revenue. They’re also clearly excited about the AI thing the CEO mentioned on Cramer, if you watched my video above. https://www.wix.com/blog/2016/06/wix-artificial-design-intel…

Trust me, it will help to go to Investor Relations where you can listen, but here’s a transcript of the CC: https://seekingalpha.com/article/4046412-wix-coms-wix-ceo-av…

Performance

We’ll start with the revenue history:


D16	S16	J16	M16	D15	S15	J15	M15
84	76	69	62	57	54	49	45

2016 totals (https://s2.q4cdn.com/476292493/files/doc_financials/quarterl…) It’s all at this link, but let me hit the highlights:

Collections: 342M (up 42%)
Revenue: 290M (up 43%)
FCF: 36M (up 149%)

Levels at end of 2016:

ARPU: $153/yr (up 16%)
Registered Users: ~97M (up 26%)
Premium Subscriptions: ~2.5M (up 39%)

A few other things…

Cash on hand was 171M, so I guess now it is 135M after the aquisition
New deferred revenue during 2016: 52M (2015: 38M) – this is awesome
SBC in 2016: 28M (2015: 19M) – about avg for a growth tech company, much lower than some

The Outlook

(midpoints…again before the acquisition)
2017 Collections: 455M (up 33%)
2017 Revenue: 410M (up 41%)
2017 FCF: 71.5M (up 98%)

For Q1 revenue guide was 89.5M. Add a million for half a quarter from Deviant, and I still think the 90.5M expected will be easily beat. I just have to imagine they plan to beat, so 45-50% revenue growth is more likely. With all the opportunity, I wouldn’t be surprised to see the rate increase in the next several quarters. But the point is, this kind of growth can make their lofty valuation look not so crazy, rather quickly.

Summing Up

100M users is an incredible network. 40%+ revenue growth for 2017 is an impressive guide, but I think it’s easily beatable. That FCF growth is astounding. Also, though it is speculation at this point it still bears repeating: I just think they have a huge open road ahead when it comes to other ways to monetize. With 100M users, 2.5M who are already paying for subscriptions, they don’t need to sell very much to very many for it to have a tremendous impact.

Comparisons to Shopify can’t help but come to mind. Wix doesn’t have nearly the force multiplier (yet) as they don’t yet do much (any?) monetization other than selling ads and subscriptions. However, they have 2.5M subscripers compared to Shopify’s 400k merchants. So…that’s nice.

I bought some shares yesterday.

Bear

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Any earnings history?

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Moat?

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100M users is an incredible network…

FWIW, TWTR has $2.5B in revenue and 315M active users. Do we know how many of those 100M are active users/ sites? What is your estimates/ guess for revenue growth and revenue 3 years from now? Do you expect them to be profitable?

My lesson from my investment in TWTR is growth is good but it should be accompanied by profits or we should have pathway to profit. Not every growth story is going to be Amazon. These companies address specific market and TAM (total addressable market) is not going to be huge.

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Bear,

Thank you for the nice analysis of WIX and bringing the stock to our attention.

I like the 2.5M subscribers and the ground breaking positive earnings of $.06 last quarter. The trend is bumpy but upwards.

YTD the price and growth per share is very similar to that of SHOP.

I will initiate a starting position Monday.

Jim

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With 100M users, 2.5M who are already paying for subscriptions, they don’t need to sell very much to very many for it to have a tremendous impact.

50 or 60 thousand users is just 5 or 6 hundredths of 1 percent of 100M. That’s all they need to sign up for premium each month to keep pace.

Bear, Thanks for an interesting and valuable presentation.

It’s important though to remember that the vast majority of their 100 million users are just free “vanity” websites, and that most of these users have no need for, and will never convert to, paid premium status. These people simply don’t need an ecommerce website. These might be a website for a small-time actor or musician for instance, so that someone can look him up on the web and see a list of his past performances, and know how to contact him, etc. Or an author, where he or she can list his or her books. These websites are not a business. They don’t sell anything. Some might even just be individuals who want to have their own websites just for the fun of it – and it’s free. (The websites are an asset to Wix nonetheless as they each have a couple of small Wix ads on them, like: This website was created using Wix, etc.)

Also you have to think in cohorts. If you consider older cohorts that signed up for their free websites 8 or 10 years ago (for example), they are still sitting there as part of that 100 million registered free users. However, those who are going to upgrade to a paid subscription have undoubtedly already long ago done so. Those who haven’t converted in 8 or 10 years (or 6 or 7 years) are probably content with what they have, and are probably quite unlikely to upgrade now.

That is not to say that WIX won’t grow at a good pace, or that it won’t be a good investment. It’s just to say don’t get overly excited about those 100 million free accounts. Stay focused on the paid subscriptions and free cash flow.

Also remember that the soon to be reported first quarter will have large expenses from their annual Superbowl promotion, and will thus likely show substantial “losses,” even non-Gaap.

Best,

Saul

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Thanks Saul for the added analysis.

Also you have to think in cohorts. If you consider older cohorts that signed up for their free websites 8 or 10 years ago (for example), they are still sitting there as part of that 100 million registered free users. However, those who are going to upgrade to a paid subscription have undoubtedly already long ago done so. Those who haven’t converted in 8 or 10 years (or 6 or 7 years) are probably content with what they have, and are probably quite unlikely to upgrade now.

Well they went from 77M at the end of 2015 to over 100M now, so I don’t think a large portion of the 100M are years-old accounts.

It’s just to say don’t get overly excited about those 100 million free accounts. Stay focused on the paid subscriptions and free cash flow.

Absolutely agree. What I probably didn’t do enough of a job stressing is that the one-two punch of adding premium members and increasing ARPU is a powerful one. And I think there’s a lot more they can do to increase ARPU than just selling higher priced subscriptions. Going from 1.77M premium members at the end of 2015 to over 2.5M now is nice…but having the other lever of the increasing value per membership is what really excites me about WIX.

That said, I do think the fact that they have 100M users is amazing…that’s just a lot of eyeballs, even if only, say, half of them are active and engaged.

Others asked:

Any earnings history? and What is your estimates/ guess for revenue growth and revenue 3 years from now? Do you expect them to be profitable?

I expect revenue to grow at 40%+ for a while. Hopefully 3 years or more. They should be non-GAAP profitable in 2017. The FCF is what I’m focusing on.

Moat? and My lesson from my investment in TWTR is growth is good but it should be accompanied by profits or we should have pathway to profit. Not every growth story is going to be Amazon. These companies address specific market and TAM (total addressable market) is not going to be huge.

I am keeping my WIX position fairly small, because I do think we need to watch to make sure they don’t slow down as they near their TAM. I’m amazed that they’ve got 2.5M paying users, and I don’t know what the outer limits are there. But as I said to Saul, 100M is amazing to me too. I don’t feel qualified to estimate how big their market is. But with 100M users, I can’t imagine 2.5M paying users is the limit.

Bear
long WIX

PS Jim, good luck to you!

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In true gentleman fashion, Saul corrected me privately, but he’s right, so I just wanted to pass it on.

That $153 isn’t “ARPU”, (or average revenue per subscription). It’s average revenue per NEW subscription during the quarter, and reflects new subs taking bigger packages. By definition, average revenue for ALL subs would be substantially lower (but also considerably up from a year ago).

It’s still good news that it’s up, but the fact that it’s up to $153/yr on new subscriptions, as opposed to that being the average annual revenue over all subscriptions, is an important clarification. Thanks, Saul.

And no, I have no idea why Wix is down the last few days, but I’m considering adding a little more.

Bear

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Hi Bear - this could be a cause but not really sure. Looks like shorts are taking interest in the stock now.

https://seekingalpha.com/article/4063366-forensic-analysis-w…

Chad

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Hi Bear - this could be a cause but not really sure. Looks like shorts are taking interest in the stock now.

It baffles me why someone would want to short a rapidly growing company. I read the short article and was unimpressed. The only thing that even registered with me was the shares outstanding thing, and it’s not like they’re hiding it. It’s not some surreptitious attempt to defraud shareholders. The numbers came from Wix!

To buy the rest of the short thesis, you have to believe that this company that has been adding users and growing its business quarter after quarter has also simultaneously been running an elaborate scam. I’m sure these are smart guys at Wix, but I’m not willing to give them THAT much credit. I think it’s more likely that they don’t think that much about stock price, and are focused on building a company.

I think I’ll buy some more tomorrow, or at least between now and 5/10, when they will report their quarterly beat.

Bear

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The short article made a big point over

Investors should be highly concerned by WIX’s audit situation: Two of WIX’s audit committee members have already resigned since coming public

Highly concerned, no less. Well, making a big deal about one member of the Audit committee who resigned in 2014, and another, who is 64, and resigned this month (three years after the first resignation) for health reasons, seems a bit over the top. Especially, the fact that this guy was very reputable and had been in a senior position at Ernst and Young, implies that it’s doubtful that there were all the shenanigans that they claim over those three years.

Tell me if you think that there were a lot of phony things going on with this guy on the audit committee.

Norbert started his career with the Financial Services Regulators in Luxembourg in 1974 where he was in charge of the regulatory supervision of financial institutions. In 1978, he worked as an auditor at Price Waterhouse in Frankfurt. In 1979, he opened the Arthur Andersen office in Luxembourg, which counted over 800 employees when he was appointed in 1994 member of the European Operating Committee and served as Regional Managing Partner, in charge of Central Asia, Eastern Europe, India and the Middle East, based in London. In 1998, he was appointed Global Managing Partner of Finance, Administration and Infrastructure of the Global Firm and moved to New York. In 2002, he managed the merger of over 50 non-US Andersen member firms into Ernst & Young and became subsequently global CFO and member of the global board.

In 2004, he returned to Luxembourg and started various new business ventures including ATOZ, a tax advisory firm and Compagnie de Banque Privée, a bank fully dedicated to wealth management. Norbert served as well as chairman of Mangrove Capital Partners, a venture capital firm, and was on the board of Skype.

Saul

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Saul,

Thank you for cutting through all the clutter and noise and sharing your wisdom and common sense with this board. Your comments about the accused member of the Audit Committee have the ring of truth.

Thank you.

Jim
Long WIX

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It baffles me why someone would want to short

So the stock price rose from $20 March 31, 2016 to $75 Apr 4th. The growth trajectory seems to be same as past few years and there is no change in profitability, etc. What is the catalyst behind such a monstrous move?

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The growth trajectory seems to be same as past few years and there is no change in profitability, etc. What is the catalyst behind such a monstrous move?

I believe you answered your own question: the catalyst is the incredible growth trajectory the company has been experiencing for years. No idea why the stock price move started when it did, but the real question is why didn’t it start earlier?

Same question applies for SHOP and many others.

Bear

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The growth trajectory seems to be same as past few years and there is no change in profitability, etc. What is the catalyst behind such a monstrous move?

Perhaps to following?

  1. Accelerating revenue growth. Here’s the percent increase in revenue year-over-year by quarter for the last four quarters:
2016:   37.7%    40.8%    40.7%    47.4%
  1. Positive and rapidly growing Free Cash Flow

2015   $14.5 million
2016   $36.2 million

Up 149.7% from 2015 to 2016.

  1. In December they had their first quarter with profits in the black (Adjusted earnings up 6 cents). For the year, adj loss per share more than cut in half, from 79 cents in 2015 to 37 cents in 2016.

Doesn’t mean the price won’t go down, but that’s a satisfying answer to your question.

Saul

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the real question is why didn’t it start earlier?

I think it is important for an investor to understand the catalyst and driver for the price performance. You may agree or disagree with it, but you need to understand what is moving the price. Dismissing it means you would not know or understand what will drive the price down either.

Investing at 52 week high is not wrong but after 400% move, and not knowing why, you should exercise more caution.

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thx