Stocks to sell

Avoid ContextLogic Until It Pulls Out of Its Spiral

ContextLogic (NASDAQ:WISH) stock has fallen dramatically since my last article on Dec. 16 and also on June 18. I have been deeply skeptical of WISH stock and tried to warn readers that the stock was likely to fall. And today, I believe that its decline is still likely to continue.

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On Dec. 16, WISH stock was at $3.11 and it has fallen over 15% to $2.53 as of the close on Jan. 13. I suspect it could keep on falling, given that its cash burn does not seem to have slowed down.

It shouldn’t have surprised anyone when management told WISH stock investors on Nov. 10 that the CEO was going to be replaced.

Moreover, he has been kept on the job until a replacement became available. Since then there has not been any announcement about any new CEO replacement. I think they are going to have a hard time finding one willing to take on this turnaround job.

Where Things Stand With ContextLogic

On Nov. 10, the company announced that revenue for the quarter ending Sept. 30, revenue fell 39% year-over-year to $368 million. This included a 55% decline in its Core Marketplace revenue.

But more importantly, its free cash flow (FCF) for the third quarter was negative $344 million. That works out to over 93% of its $368 million in revenue for the quarter.

Running numbers like this will quickly bring a company to ruin. If almost 100% of the revenue goes out the door in cash burn, there is no way that the company can get ahead.

This kind of cash burn works out to an annualized cash burn rate of $1.376 billion. But the company has just $1.315 billion in cash and securities on its balance sheet, and this is before $536 million in liabilities. So its net cash is only $779 million.

That implies if the company does not turn its finances around quickly, or bring in an infusion of cash, it could be facing insolvency of some sort.

Where ContextLogic Might End Up

The market knows ContextLogic is nearing a point where it is either going to have to borrow debt, raise more equity, or both. In any case, none of these options are good for shareholders.

The bottom line is that the company needs a cash infusion. Or else ContextLogic’s revenue has to rise quickly and the company has to become profitable from a cash flow standpoint.

This implies that ContextLogic will either borrow a large amount of money or else do a secondary equity offering fairly soon, or both.

The possibility that these events could happen has been depressing the stock price. Moreover, as I pointed out last time, the new CEO is going to want to put his imprint on the company. He probably realizes that drastic cuts will have to be made. That could cost more in terms of losses, which will have to be financed.

And things are actually worse than that. Because of the company’s negative cash flow margins, the higher it grows sales, the higher its losses will grow. This is essentially a death spiral for the company.

What to Do With WISH Stock

The market may not yet have fully discounted a large degree of potential dilution. For example, if the company needs to raise $400 million, which represents about one-quarter of its $1.688 billion market value, WISH stock may fall further than 25%. This is because of the “dump” factor, where people quickly get rid of their shares once they see the company is in trouble.

Moreover, if ContextLogic raises a lot of debt, this will lower profits and cash flow due to the interest costs. There is always the possibility that the company could go bankrupt if it can’t handle the additional debt.

Most investors will likely wait until the company’s upcoming earnings release for Q4 and any major announcements ContextLogic makes. This will allow investors to deal with the options the company puts forward.

On the date of publication, Mark R. Hake did not hold any position (either directly or indirectly) 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.

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