What happened
Shares of no-code website builder and management software company Wix.com (NASDAQ: WIX) fell 23% last week following its second-quarter 2021 earnings update. The stock had been rallying back toward all-time highs in July before this most recent tumble, but is now down 18% so far in 2021.
Image source: Getty Images.
So what
Wix's Q2 results weren't the problem. Revenue of $316 million (year-over-year growth of 34%) was $2 million higher than management's guidance. Millions of entrepreneurs and small businesses are still migrating their operations over to the internet, and Wix is a trusted partner with a diverse and easy-to-use toolset for many of them.
However, in spite of Wix's software development platform benefiting from a new digital era, many of its customers are not immune to the ongoing effects of COVID-19. On the contrary, management said on theearnings callthat some businesses in certain markets are grappling with new pandemic mandates because of the fast-spreading delta variant, and some are considering temporarily shutting down again. This is creating a short-term overhang for Wix as some of these customers are delaying spending on new initiatives.
The result? Revised guidance to the downside for full-year 2021. Revenue is now expected to be in a range of $1.255 billion to 1.27 billion (previously $1.28 billion to $1.29 billion). Free cash flow was also downgraded to now be in a range of $35 million to $40 million (previously $62 million to $72 million).
Now what
A reduction in sales guidance is never a good thing. But management reducing its outlook by approximately $25 million, equating to a some $3.5 billion reduction in market cap in a week (from just over $15 billion on Monday to $11.6 billion as of market close on Friday)? Suffice to say the market's reaction to Wix's Q2 update might be overblown.
Granted, some investors might chafe at the meager profits the company is generating this year. However, bear in mind this is by design as Wix is spending heavily to expand its capabilities -- like the recently announced Branded App by Wix service that allows users to build their own mobile applications with little to no experience in software development. This cloud software business is still growing at a healthy pace as a result of all its new projects. Even with the reduction in expected sales, Wix revenue is on pace to be at least 27% higher this year than last.
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Nicholas Rossolillo and his clients own shares of Wix.com. The Motley Fool owns shares of and recommends Wix.com. 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.
