ContextLogic (NASDAQ:WISH) operates Wish, an e-commerce platform that facilitates transactions between sellers and buyers, focusing on the budget-conscious consumer. Founded by Piotr Szulczewski and Danny Zhang back in 2010, this company has grown rapidly due to its innovative business strategies and easy-to-use platform. However, due to issues surrounding quality on the platform and wider reopenings, investors are panicking, which is why WISH stock is down 30% in the last three months.
Normally, that would mean there is substantial upside for you to exploit. However, that is not always the case. On Nov. 10, ContextLogic released its third-quarter earnings report. Unfortunately, trends in user and engagement ran contrary to Wall Street expectations.
For the full year 2020, MAUs jumped 19% over the year-ago period to finish at over 107 million. Meanwhile, ContextLogic’s profits have skyrocketed as well, with an unprecedented $640 million in revenues added, mainly from the logistics business. Looking ahead, this is a key area of growth for the company. Due to the wide-ranging shutdowns and higher volume shipments, the segment did unusually well last year. However, now ContextLogic has to plan on making the business more sustainable moving forward.
However, as the economy reopened and coronavirus restrictions eased, ContextLogic began to suffer. The third quarter is yet another chapter in this story. ContextLogic has reported a challenging quarter ahead in the last three months of their fiscal year. The shipping company, Wish has issued a warning that next quarter will be worse than this past one. The reason for this is that the company’s year-over-year revenue in the most recent quarter dropped by 39% while MAUs dropped by 40%. Considering these factors it is best to wait a bit before committing more capital.
What Needs to Happen for a WISH Stock Comeback
The rapid decline in active users has sent WISH stock into a tailspin. The e-commerce company depends on strong top-line growth to make its business model work. But this isn’t happening now that the pandemic is less of an ongoing concern for many people. The company reported a loss per share of 5 cents, with revenues falling short of analyst estimates by $5.9 million. Looking ahead, the main issue is reducing the churn rate. Part of that has got to do with a pullback in the marketing spend.
To address the quality issues plaguing Wish, ContextLogic decided to divert the funds from its marketing budget. Although that will lead to long-term benefits, it will have drastic consequences in the short term. Wish is not a household name as of yet, and it needs to continue spending money to maintain its market share. WISH stock has been on a steady decline since the second-quarter MAU shock and needs a fresh catalyst like an increase in monthly active users or positive revenue growth to mount a comeback.
Apart from this, there are two other things, WISH stockholders need to watch out for in the coming weeks. First, is ContextLogic changing its direction on the marketing spend? And second, what is being done to address quality control issues? If there are any positive developments on this end, they will also serve as positive catalysts for growth.
The Long-Term Vision and Chinese Merchants
The bulk of merchants on the platform are Chinese. Undoubtedly, consumer quality in the country has grown by leaps and bounds. However, Chinese merchants still do not face regulatory scrutiny as American merchants do. That can be tough for U.S. consumers used to a certain level of quality.
The rise of Chinese e-commerce is a significant shift for the American market, as shoppers buy directly from manufacturers and merchants. Wish and sites like AliExpress and Amazon (NASDAQ:AMZN) have enabled more sellers to penetrate America where they compete with US companies who themselves import goods from China. However, companies like Amazon maintain an effective quality control department to ensure long-term success.
Wish users have complained about counterfeit and knockoff products and have said that their demands for refunds were ignored after purchases. In retail, perception matters a great deal. Looking ahead, it has to have a sound strategy to kickoff fraudulent merchants and make sure a high-quality product is delivered. If that is not possible, then the brand will suffer.
Another potential issue might be the U.S.-China trade war and how that could affect perceptions of the company moving forward. Regulatory activity is intense between the two countries. Most recently, the two countries are looking to restrict Chinese companies’ U.S. listings, leading to a windfall for Hong Kong. If there is more expansive regulation, it may end up hurting WISH stock quite badly.
Wait for Positive Catalysts Before Deciding on WISH Stock
In 2020, ContextLogic experienced massive business growth because of the pandemic. But in 2021, headwinds are growing, especially regarding MAU declines, which have caused their valuation to drop substantially in the year thus far. On top of this, concerns are rising about product quality. All of these factors are weighing down investor sentiment.
Therefore, it is best to wait it out and make sure Wish is moving in the right direction before committing more capital.
On the publication date, Faizan Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Faizan Farooque is a contributing author for InvestorPlace.com and numerous other financial sites. Faizan has several years of experience analyzing the stock market and was a former data journalist at S&P Global Market Intelligence.