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ContextLogic Could Stay Cheap and Keep Falling Until It Turns Profitable

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ContextLogic (NASDAQ:WISH) stock has had a rough ride this year. WISH stock ended last year at $18.24 and as of Sept. 3, it was down to $7.24. That is a drop of $11.00 or -60.3% year-to-date.

The logo and information for the Wish (WISH stock) mobile app are displayed on a smartphone.

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So far I have been too early in my prior article, calling for the stock to rise, given its low relative valuation to its peers. However, in June I wrote that it may take some time, since ContextLogic, the discount e-commerce company with its WISH app, is not profitable. This was despite the fact that WISH stock was cheap.

After the company’s most recent quarterly results, I am returning to that original view in June. I suspect that WISH stock may actually be in for a further drop until the company’s efforts to turn its operations around take root.

Where Things Stand With ContextLogic

On Aug. 12, ContextLogic reported that revenue fell 6% year-over-year (YoY), a disturbing anomaly for an online e-commerce company. Moreover, the company’s losses skyrocketed to $111 million from negative $11 million last year. Adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) dropped to negative $67 million from positive $16 million a year ago.

Management seems surprised by these results, blaming it on a return from lock-down habits and activities by its users in its shareholder letter. In other words, since people were no longer stuck at home, they weren’t buying as much.

Maybe that is the reason. But if so, why did Amazon (NASDAQ:AMZN) report a 27% sales rise in the past quarter on a YoY basis? Moreover, Shopify (NYSE:SHOP) had a 57% increase in sales, and Poshmark (NASDAQ:POSH) had a 22% sales gain. The point is that most online e-commerce companies reported good sales gains, but not ContextLogic. So there is something wrong at its core that needs to be fixed.

ContextLogic’s management is taking steps to reduce its costs and overhead, and trying to fix operational issues. At least according to the shareholder letter, they seem to be taking steps, such as lowering its digital ad spending. But there is no real revelation why the company’s sales are deteriorating. Hopefully, those steps will help the company recover its sales progress.

However, the company is still not willing to provide any guidance going forward. That is not a good sign.

Where This Leaves ContextLogic

Analysts have become decidedly negative on WISH stock. For example, JPMorgan just downgraded the stock from Overweight to Underweight and lowered its price target from $17 to $5 per share. In addition, four other major brokerage firms made the same switch on Aug. 13 from Overweight to Underweight, according to Yahoo! Finance.

Not all investors are willing to wait for a turnaround. Recently Bloomberg reported the company is being sued by some investors that complain that insiders sold stock that was improperly inflated with false growth projections.

Nevertheless, TipRanks.com reports that 10 analysts who have written on WISH stock in the last 3 months still have an average price target of $9.81. This represents a potential upside target of 35.5% from today’s price (Sept. 3) of $7.24.

What To Do With WISH Stock

Investors should be careful with WISH stock. I was already too early in calling for it to rise. With the disastrous Q2 results, it looks like it is going to take some time for ContextLogic to get a handle on its growth issues. I suspect that, although WISH stock remains undervalued, it is going to be at least to the end of this year before the company can show that it is turning around.

Investors might want to wait before buying into this falling knife situation. The stock could cut investors who think it is undervalued. It may be too early to call the inflection point.

On the date of publication, Mark R. Hake did not hold a position, directly or indirectly, in any security mentioned in the article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Mark Hake writes about personal finance on mrhake.medium.com and runs the Total Yield Value Guide which you can review here.

The post ContextLogic Could Stay Cheap and Keep Falling Until It Turns Profitable appeared first on InvestorPlace.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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