Someone asked me off-board to share my thoughts on Wix, particularly Q2.
A quick look at the quarter
Collections: up 37% YoY
Revenue: up 41% YoY
Gross Profit: up 35% YoY
Operating Expenses: up 27% YoY
Operating Loss: 6.5M (down from 10.6M in June Q 2017)
Free Cash Flow: 23.9M (up 37% YoY)
Registered Users: 131M (up from 109M in June Q 2017)
Premium Subscribers: 3.7M (up from 2.9M in June Q 2017)
Average Annual Revenue Per Subscription: $157 (up from $143 in June Q 2017)
Thoughts going forward
I think Wix will be similar to Paycom and many others that have turned profitable. Though revenue growth may slow from 40% or 50% to (at some point) 25% or 30%, EPS growth will be triple digit for several quarters, and then 50% - 100% for possibly a few years. (e.g. Paycom’s EPS grew 102% last quarter…impressive, but Wix’s grew from 0 cents to 29 cents.)
Mar Jun Sep Dec
2016 -.30 -.09 -.04 +.06
2017 -.18 0.00 +.01 +.16
2018 -.05 0.29
29 cents? What!? Not only is that a huge jump for the June quarter, but that’s more than they’ve ever had in any quarter, even December. But with gross profit up 35% and expenses up only 27%, it’s not a shocker.
And this is no surprise to the market. Wix’s PE is 237 (not a typo). However, they just made 29 cents versus 0 cents last June. This PE will come down fast. It’s not unreasonable to think that this quarter’s 29 cents may become 40 or 50 cents in September and much more in December. The market expects just 23 cents and 32 cents, respectively. What will happen? I don’t know. But I know that growth will not be linear.
I don’t believe Wix will ever again have an EPS loss. It’s time to start looking at the earnings power of this still fast-growing business in addition to its revenue growth rate.
Great insight Bear. I have been in Wix for 6 months plus and have appreciated you sharing your insights and findings as they are helpful in me vetting out my position.
I agree wholeheartedly with your view of the EPS growth trajectory and that it should accelerate rapidly. In just a couple quarters my model puts the PE around 100 (even at a P/S of 10) and in five quarters it would be under 70 at the same P/S. Keep in mind this would be with stock price appreciation given the revenue growth driving the “S” in P/S higher. While visibility gets cloudy and it becomes a bit of a run rate exercise, I like to extrapolate my holdings a few quarters out to watch the transition from P/S to P/E to see if the relative value holds up as the company turns profitable.
My main concern with Wix that is starting to give me more hesitancy is the Google accounting change that is artificially inflating growth (quote from investor slide below). The growth trend looks fine on the surface with growth rates slowly dropping over time as is normal for early stage fast growth companies. However, the Q1 and Q2 quarters (plus 2H guidance) include $7M-$8M of additional Google revenue per quarter that is being recognized on a gross basis. This did not happen in FY 2017, so each quarter has $7M-$8M of revenue / collections that is the result of an accounting decision, not true business growth. The $7M-$8M translates to +7-8pts of additional growth each quarter. Without this accounting change the Y/Y growth rate in Q2’18 would be +34% Y/Y(not +41% Y/Y) compared to +51% Y/Y in the year ago quarter. That is a slightly more aggressive drop than I like to see and I think ~30% growth will be the new normal for Wix once we are past this year of accounting change revenue growth. +30% Y/Y is nothing to scoff at, but what kind of P/E or P/S would that justify? Hard to say but it is obviously lower than the value you’d give a +40% Y/Y company.
I am not selling, especially given the current dip. I think Wix has been unfairly hit harder than some other names which I think are a bit more richly valued on a relative basis. However, I do think this growth trajectory will have me a little more wary of Wix’s valuation going forward as I don’t think it is at the point in its business cycle that it can simply grow past any valuation.
Here is the IR quote:
“The following results are also presented, unless noted, using the change in accounting we announced last quarter related to our revised agreement with Google. Beginning in Q1 2018, we changed our method of accounting for revenue and collections from net (agent) to gross (principal). As previously stated, this impact is an approximately $30 million benefit to FY 2018 revenue and collections and approximately $7-8 million each quarter in 2018. This impact also has resulted in a year-over-year decrease in our GAAP and non-GAAP gross margin.”