ContextLogic Inc.: Meme Stock Buzz Is Just The Cherry On Top
Jul. 06, 2021
Summary
Wish is building out a comprehensive e-commerce platform/ecosystem for merchants, better products and vendors will come aboard with time as they execute.
The new executive chair's comp package features PSUs that will vest if the stock price is much higher than it is today.
The stock reminds me in some ways of Etsy and Pinterest after they fell from their IPO prices before rising higher later on.
WISH has seen an uptick in interest as a meme stock but it can perform well even without this.
Intro
Founded just over a decade ago, San Francisco-based ContextLogic Inc. (WISH) (hereinafter referred to as 'Wish') describes itself as “one of the largest and fastest growing global e-commerce platforms, connecting millions of value-conscious consumers in over 100 countries to more than half a million merchants around the world.” The stock has received a flurry of recent investor attention (and volatility) by becoming one of the latest apples of Reddit’s eye as the next ‘meme stock’. But unlike previous meme stocks like AMC or Hertz, which investors bought in an almost nihilistic fashion, Wish actually has some interesting things going for it behind the noise that could propel the stock higher on its own even without the meme stock halo. I look at the meme stock possibility as just one of several catalysts and an added bonus. Let’s take a look at some of what's going on with Wish below.
Criticisms are Being Addressed
A lot of the criticism I see here and elsewhere surrounding Wish center around the notion that it mainly sells cheap trinkets from China. But in reality, what would Amazon (AMZN) or eBay (EBAY) be without low-priced merchandise from China? (Yes I know Amazon has AWS but just speaking in terms of the ecommerce business). Once you get past a few branded results, if you're not typing in a specific brand, whether you're looking for kid's sneakers or office chairs, most of the results are from merchants and companies you've never heard of, and a lot of these goods are made in China. As my Seeking Alpha colleague Main Street Investor wrote in his excellent article on Wish, “Most of the goods being sold on Amazon or eBay were also produced in China, although they earn a higher perception due to one-day delivery shipping programs or higher prices.” Much of the 'made in China' critique seems politically-motivated at best since China is an easy scapegoat as it is not very popular with either political party in the U.S., but that is a topic for another day.
While critics are to some extent right that product selection skews towards lower-end wares, the important thing is that Wish is building a platform and developing an ecosystem for merchants - if they get that right, better products and merchants will come over time, and Wish understands this. In its Q1 2021 shareholder letter, Wish highlights that it is working towards adding higher-value items such as electronics to its platform, as well as higher-frequency items such as consumer packaged goods products and more branded goods in general, so this is certainly something Wish management is cognizant of. Management also states that “...Across all markets, we are de-emphasizing low value items, which tend to have high conversion rates but unfavorable economics,” so they seem to be thinking about this in the right way.
Most interestingly, Wish alludes to its ‘logistics-as-a-service’ business: “Our logistics-as-a-service pilot is underway. We are working with a selection of independent e-tailers that do not currently sell products on Wish. These merchants will leverage our logistics services, including shipping Wish Local locations for in-store pickup, while benefiting from our efficient and data-driven shipping process and volume discounts.”
If Wish can be successful in building out this logistics as a service angle, it would help to make Wish a true comprehensive ecosystem for sellers similar to a Shopify (SHOP), for example. Wish states that opening up its platform to non-Wish merchants (and thus monetizing them) is one of its core priorities going forward so if they can effectively execute on this platform it could be a big growth driver for Wish going forward. To this point, Wish recently announced a partnership with PrestaShop, a European- and Latin American-focused e-commerce company with 300,000 merchants, which will allow these merchants to sell to customers on Wish's marketplace and also give them access to Wish's merchant dashboard.
Investors Overlooking Wish Because They Don't Shop There
It is also common to see investors dismiss Wish because they feel that they would not buy anything from it, but investors have to remember that they are not representative of the population at large. Stocks like this sometimes fall in the 'blind spot' of the investment community. While we as members of this Seeking Alpha investment community may consider scrolling through products on Wish to be a lowbrow form of entertainment, we have to remember that for a large portion of the population, scrolling through social media feeds or pictures of merchandise online and clicking buy is considered to be almost a default mode of entertainment, for better or worse. It works for Pinterest (PINS). This same dismissal of products or platforms that are outside of their wheelhouse is what caused many investors to miss stocks like Pinterest when it was trading at $10-$12 or Etsy (ETSY) at $6. As Forbes wrote in a piece profiling Wish's founder and CEO Peter Szulczewski in 2019, Wish "Shoppers scroll through an average 600 to 700 items, hypnotized by a pixelated parade of weird and wacky products that scratches the same visual itch as an Instagram feed. Around 80% of Wish’s first-time customers will return to buy a second time."
One additional point here - while some people have complained about Wish's shopping experience, i.e. scrolling through images and deals rather than searching for what they are looking for directly, this style of 'discovery-based' shopping has worked out well for Pinterest. Some shoppers enjoy the 'treasure hunt' aspect of it and do it for entertainment, and it also leads to impulse buys and people buying things they may not have ordinarily spent on.
Etsy/Pinterest Analogue
Speaking of Etsy and Pinterest, while these are of course not direct comparisons and are probably higher quality businesses at this point in time, I think that both offer interesting analogues to Wish. Both were emerging online platforms (and e-commerce platforms to varying degrees although monetizing the experience in different ways) that initially performed well at their debuts, subsequently slumped, and then languished in the market for a prolonged time until they eventually made progress on executing their strategies and investors took another look and re-rated the stocks, at which point the stocks' performances accelerated rapidly.
Etsy traded at around $25 shortly after its IPO in 2015, only to fall into the single digits for most of the next year. It traded in the $10-15 range during most of 2017 and kept grinding higher from there - the rest of the story is obviously history, as Etsy today is a $200 stock.
Pinterest is a more recent example. Pinterest fell from the mid-$30 range in the summer after its 2019 IPO but sank into the mid-teens as the luster from its debut came off and then crashed to just over $10 a share during the pandemic-related market lows of March 2020. I wrote an article recommending Pinterest at $13.82 shortly after that, based on it becoming an e-commerce play, and less than a year later, Pinterest was approaching $90 a share (before settling at around $80 at time of writing), representing a great return.
Again, these are not perfect comparisons but it is easy to see some similarities between these two and Wish, as recent e-commerce IPOs that fell in the months following their IPOs and were written off by investors who dismissed their business models, but who then executed on their plans and enjoyed significant share price appreciation over time as the market came back around to their story and gave them another look.
New Executive Chair/Comp Package
Wish recently hired a new executive chair with an impressive track record in the e-commerce space, Jacqueline Reses. Reses was most recently the executive chair at Square and previously served on the Board of Alibaba (BABA). Interestingly, she also serves on the board of Bill Ackman’s Pershing Square Tontine Holdings (PSTH), the SPAC that will soon be taking a stake in Universal Music Group when it spins off from Vivendi (OTCPK:VIVEF). Clearly past performance is no guarantee of future results but I like the fact that Wish now has a high-ranking figure from an e-commerce giant like Alibaba on its board, and one who was a key player during its rise as a public company.
In addition to her impressive background, perhaps an even more interesting takeaway here is that much of her compensation package is tied to restricted stock units and performance stock units. Special thanks to Andrew Walker of the excellent Yet Another Value Blog (not to mention the great podcast of the same name as well), who points out that in order for the PSUs to fully vest, WISH’s price would have to “go up >2x from the company’s stock price on April 20th, 2021 by May 15 2023. On April 20th, the stock closed ~$12/share, so the stock needs to touch ~$25 for her to fully vest those PSUs” and that the stock would have to hit $36 for the PSUs to max vest.
Walker explains that while these internal targets are no guarantee, they are a good sign nonetheless because “companies don’t give out big share awards to a new exec with a buzzy background without both parties believing there’s a very realistic chance that they hit some of the bear targets.” Further to this point, I would have to believe that an executive with Reses’ credentials would not put their credibility on the line and get involved with a company like Wish if they didn’t think there was something there.
Lots of Cash/No Debt
Another positive that separates Wish from some of the previous meme stocks like Hertz or AMC is that it isn’t saddled with a heavy debt load - in fact, Wish has no long-term debt and a fairly decent cash position. It isn’t in the same dire financial straits as some of its meme stock predecessors. Wish is burning a lot of cash on marketing and SG&A as they seek to acquire new users and to grow the business, but for now, with a recent infusion of cash from the IPO, Wish is in a decent position from a cash/liquidity perspective, with about $1.8 billion in cash and marketable securities on hand according to its most recent filing.
Investor Base
The Stock Bros did a great job of laying out who some of Wish’s most notable investors are in a recent Seeking Alpha article, so I will not belabor that point here, but it suffices to say that Wish has a handful of prominent and successful investors with great track records in tech and e-commerce who all have a stake in the business. These include Joe Lonsdale, one of the co-founders of Palantir (PLTR), Peter Thiel’s Founder’s Fund, Hans Tung of GGV Capital, and early Facebook (FB) and Twitter (TWTR) investor Yuri Milner. These are serious-minded investors with deep expertise in the tech space, not momentum chasers swayed by the latest meme stock buzz. Based on Thiel’s track record with companies like PayPal (PYPL), Palantir, and Facebook, that is one of the types of investors that I am looking to invest alongside with.
Amazon Sees Something Here
Amazon, the e-commerce platform that all e-commerce platforms aspire to be, reportedly once offered Wish founder (and current CEO) Peter Szulczewski $10 billion to acquire the company when it was still private, an offer which Szulczewski turned down. With a current market cap of just under $6 billion, this represents a significant premium to where Wish currently trades now. While the offer is neither here nor there at this point in time since it is old news, it does show that Szulczewski believes the company is worth significantly more than its current market cap, and he is still a large shareholder, owning about 9% of the company. Furthermore, Amazon clearly sees some value in the company and its technology/platform otherwise they would not have tried to acquire it.
Risks
While downside seems to be fairly limited at these levels, of course all investments come with risks. I foresee the biggest risk for investors in WISH as the company’s high cash burn and significant marketing/SG&A spend as it seeks to grow and acquire new users. There is the risk that if the company ‘turns the faucet off’ and stops promoting so heavily, that customers dry up, or conversely that they will have to keep up this high level of spending and eventually need to raise cash and dilute investors with an equity offering. The management team is aware of this and points out that while sales and marketing expenses were 60% of revenue in Q1 2021, this is down from prior quarters, and that they have a long-term target of about 40%. The company is losing money, and net losses widened from $79 million in Q1 2020 to $128 million in Q1 2021.
While I would be remiss not to at least mention that there are also several lawsuits against Wish, surrounding the decrease in the company’s share price after the IPO, I am not overly concerned about this as it seems that every company whose stock price drops gets sued nowadays by the same handful of law firms, whether it is Wish, Jumia (JMIA), or Lyft (LYFT), and very little ever comes from any of it besides fees for the lawyers and perhaps some publicity.
Additionally, there is also a VAT tax that will come into play this month in Europe, which could negatively affect Wish’s business there.
Conclusion
Wish is a beaten down recent IPO that has a lot of interesting irons in the fire. I'm not saying that Wish is not without its challenges or that it deserves to trade at the same type of multiples as a Shopify or an Amazon at this point in time, but at these levels, if it can execute on its strategy it can reward risk-tolerant investors, with its status as a meme stock just a potential cherry on top.
