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There's this running joke in my family. We might be sitting around doing nothing and one of us will pop out with, "Hi, I'm Karlie, and I just created this awesome new website with Wix!"
Yeah, I know. You don't get it. Nothing against Karlie Kloss, but we just find it hilarious for some ridiculous reason. I also find it hilarious that Wix.com Ltd. (NASDAQ: WIX ) stock lost $50 million in 2017 and has never made a profit but has a $3.2 billion valuation.
Will WIX Stock Grow Into Valuation?
But there are a few things about WIX stock that give me hope that, unlike most other insanely valued stocks, WIX stock may actually grow into its valuation. Plus, it's an Israeli company and I always cheer on Israeli companies.
Wix has a strong product, and one that has taken a lot of difficulty out of creating websites. If you're like me, you don't want to deal with any building, so you outsource it and pay for it in the process. If you are more price-sensitive, you use a website builder.
Now, website builders are effectively a commodity. That means a business like Wix.com has to build a better mousetrap with better service. I think it's done that. We can also see a few other things in its earnings presentation . On page 8, we see very nice charts showing registered users and premium subscriptions, and that they are rising at a very nice clip - the former at 22% year-over-year and the latter at 31% YOY.
On page 9 is a very significant chart. It shows that as time passes, Wix premium users remain premium users. Of the 18,513 premium users that joined in the first quarter of 2010, 17,712 are still there. That's incredible retention - 68% of gross new subscriptions are for one year or long. And 82% of total subscriptions are as well.
This has led to accelerating revenue growth (page 4), now at 41% YOY growth. Q4 revenue was $118.5 million and $426 million for the year. That's up 47%. Most importantly, WIX stock is generation $71 million of free cash flow. That's up 95% YOY. Gross margins are fantastic as you might expect, at 85%.
Meanwhile, WIX stock management has been constantly improving its product and adding more and more functionality. This is why I think it's outperforming its peers.
WIX Stock and Profit
This just leaves the rather vexing problem of profit. Wix has been around for 12 years now, and has pretty consistently generating a net loss of around $50 million. In its 2018 guidance, it said nothing about profit. It's focusing on cash flow, which is what companies that aren't making profits do.
I think Wix stock is overvalued at $3.2 billion in market cap, but if this level of growth can be maintained and hit $100 million in actual profit, then we're on to something. I do think, based on what I'm seeing with the constantly improving product, that this is possible. It's just a question of whether you want to take the risk of getting in now.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance and is the manager of The Liberty Portfolio at www.thelibertyportfolio.com. He does not own any stock mentioned. He has 23 years' experience in the stock market, and has written more than 2,000 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.
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