How Will Fare Challenging Its Deeper-Pocketed Rivals?

At the beginning of the internet age, only large corporations could afford to build and maintain a website. But today, (NASDAQ: WIX) makes it easy for even individual hobbyists to create an online presence. Investors in this upstart website builder may be worried that it could get outmaneuvered by larger, deep-pocketed competitors. On this Motley Fool Live episode, recorded on March 17, Fool contributors Brian Stoffel and Brian Feroldi discuss this website construction specialist's strategy for growth and why they aren't worried about the competition.

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Brian Stoffel: I'm going to talk about For people who aren't familiar, the best way to explain Wix is it's like Shopify Lite. I'll just use a quick example here. Brian Feroldi has just started these drawings that, is there one a day? Is that basically what you do? He's got one drawing a day that you put out that people can get and he doesn't use Wix for it. Someday, he's going to teach me probably via Twitter how to do this, because I think it's really interesting and he's been teaching me things in front of everybody.

But it's a website where individuals can create their own personal brand, their own personal page, because while Shopify might work really well for, say, a coffee vendor or a small vendor that has a brick-and-mortar location, Wix is more for like creative types: an artist, an author, a Motley Fool analyst who wants to make pictures for people to understand the markets better. It's really underappreciated because they're not going after those obvious vendors and merchants, but the creative class globally is actually quite large.

To show you what I mean, this is how they performed over the last quarter. The creative solutions are the kind of people that I'm talking about. Your artists, your artisans. These business solutions are more focused on people who are doing high-volume business by building a website on Wix. I should say that the way that Wix works is that you can do most things for free. They have a base of over 200 million free users. But they have monetized less than 3 percent of those users. That is a huge stable of people to grow from. Their creative solutions did very well. They grew 25 percent from right here, 236 million, from right here where it was 191.

But their business solutions are growing even faster. They were up about 109 percent between last year and this quarter, and they see that growth continuing. You see that they had about 30 percent year-over-year growth during all of last year, and they see it staying about the same over the next 12 months. To me, that's very impressive. If there's one thing I would look for, I'm going to continue looking to see what percentage of users are becoming paying users. That's actually a pretty big deal because if you can go from 2.3 percent to 2.7 percent, that might sound like a little bit, but it grows the number of registered paying users by an enormous amount. If there's one thing that I'll be watching over the next 12 months with Wix, which is a stock I wish that I really had a chance to go back and invest in, it would be that, the percentage of users that are now paying for a premium service.

Brian Feroldi: Brian, if you look at Wix's historic strategy, it's really to go after the extreme low end of the market. Again, attract people with essentially free and then upsell them over time. They've done a fantastic job with that. Now they're offering tools that essentially make them Square lite, Shopify lite, BigCommerce lite. Do you think that they're going to start encroaching on those companies' territory and can they compete, or is the market so big that it doesn't matter, there won't be one winner?

Brian Stoffel: I think the market is so big, it doesn't matter. Here's the analogy I use for that.

They're casting nets. I've written about this before. Shopify, in its essence, is in the business of catching black swans, because they don't know. If they get 100,000 companies to sign up over the next 12 months, I bet 100 of those 100,000 companies or 1 percent is going to provide the bulk of the revenue going forward, but they don't know what 100 they are, they don't care. What Shopify does is they cast their net in this middle market where people are already willing to pay you for things.

Wix is starting down here. Most of the time, I'm guessing a Wix user isn't going to switch over to Shopify because that's a pain in the butt and you've got to learn a whole bunch of new stuff and you've got to pay someone to make that migration. I just think they're casting their nets in different seas.

The fun part is, is that Wix, they have the potential to grow even more. Fewer of them will, but they will grow even more because they're starting at a smaller base. I'm curious to see how it plays out. I think that they can both win. I don't think that there's a ton of encroachment, but if there is, it's going to benefit Wix more than it benefits Shopify.

Brian Feroldi owns shares of Shopify and Square. Brian Stoffel owns shares of Shopify. Brian Withers owns shares of Shopify and Square. The Motley Fool owns shares of and recommends Shopify, Square, Twitter, and The Motley Fool has a disclosure policy.

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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