Context Logic (NASDAQ:WISH) stock has had a rough few weeks.
The company posted dismal second-quarter results and expected the slowdown to continue in the third quarter.
Consequently, WISH stock is down more than 30% this month.
Long-term growth drivers are in place, but its troubling fundamentals and business risks have me concerned about the stock’s potential.
WISH stock has been on a negative run since going public in December. The stock has shed over 65% of its value in the past year.
There have been plenty of positive developments along the way, but they have done little to reverse its fortunes.
In the past three months, its consensus price targets have dropped significantly from $18.80 to right around $7. Moreover, the short interest in the stock has also evaporated, which points to more testing times ahead for WISH stock.
Having said that, let’s look at why several analysts, including me, are compelled to reevaluate their positions on the stock.
Dismal Second Quarter
There’s no sugarcoating this: ContextLogic’s second-quarter earnings card was bad. Its revenues fell 6% on a year-over-year basis to $656 million, missing over $60 million estimates.
Its net loss increased from $11 million to $111 million and missed estimates by considerable margins.
Additionally, the company’s monthly active users (MAUs) dropped 22% from the prior-year period to $90 million in the quarter. Quarterly active buyers tanked 44% to 17 million as well.
The easing of Covid restrictions has a lot to do with the grim second-quarter report. The company has admitted to quality control and logistical challenges that also have weighed on user retention.
Context Logic has plans to limit its marketing expenses to free up its resources and expand its logistics network. It warned that lowering ad spending may constrict its MAU and revenue growth in the third quarter.
The company hasn’t provided any guidance for the third quarter, but it appears it is likely to miss analyst expectations of 24% of sales growth for the year.
It expects that its adjusted EBITDA will improve on a sequential basis by the fourth quarter. That seems like a tall order at this point, considering the rising costs and lower engagement rates.
Operational Risks
The Wish platform essentially sells discounted products to buyers from more than 100 countries. Many of the merchants on the platform are from China, so deliveries and processing of returns take so much time.
Even though there have been objections about low-quality and counterfeit products in the past, CEO Peter Szulczewski said that customers were no longer complaining about shipping issues as they used to.
The costly expansion yet failure of its logistics network, though, is a major concern for the company and quality control.
Szulczewski states that it’s imperative for the platform to “improve other areas of our business, starting with product quality.”
ContextLogic will be implementing a revenue-sharing model which incentivizes merchants selling higher quality products. As Wish continues supporting its sellers with subsidies, though the platform may find it tough to generate profits anytime soon.
Moreover, rising mobile ad costs due to Apple’s recent iOS update will also weigh in on the company’s bottom-line results.
Bottom Line on WISH Stock
The company’s results have been unimpressive, and it expects the slowdown in its top and bottom-line results to continue in the upcoming quarter.
The business risks are such that it will be exceptionally challenging for it to generate profits anytime soon. Therefore, WISH stock is too risky to invest in at current levels.
On the date of publication, Muslim 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.m