Wix: Seize The Opportunity As Growth Prospects Are Solid (NASDAQ:WIX)

Introduction & Investment Thesis

Wix (NASDAQ:WIX) is a leading web development platform that had a fairly volatile year in 2023. However, it still managed to outperform the indices. With the stock up 5% YTD, I believe there is room for significant upside from current levels. The company beat both its top and bottom-line expectations in the Q3 FY23 earnings report, and at the same time, the management revised its revenue and earnings guidance upwards for Q4. With the company expected to report its Q4 FY23 next week, I believe that the company’s strategic initiatives to drive growth in its Partners business by launching Wix Studio, while actively ramping up its AI product offerings will enable the company to drive higher conversion and monetization on its platform while improving its margins. This should allow the company to drive sizable returns of approximately 40% over a 5-year investment horizon. In this post, I will explain why I think so.

About Wix

Wix is a cloud-based web development platform that provides a user-friendly drag-and-drop interface, a variety of customizable templates, and a range of features and tools to help individuals and businesses build websites and mobile applications without the need for advanced coding skills.

In terms of its business model, Wix derives its revenue from a combination of subscriptions and business solutions. As per its Q3 FY23 earnings report, 74% of its revenue was derived from Subscriptions, while 26% came from Business Solutions, which include e-commerce features and booking systems.

During its Analyst Day, Wix management underpinned the company’s two primary growth engines that it is focused on. The first growth driver is its Partners business, which grew 38% YoY in Q3, as Wix launched its specialized product, Wix Studio, which we will talk about in greater detail in the next section. The second growth driver is AI, where Wix is rapidly innovating in order to re-accelerate growth in their Self Creator business, where they estimate double-digit growth with improving macroeconomic conditions.

Building the bull case

A promising revenue trajectory as Wix focuses on in its Partner business and AI

As per its Q3 FY23 earnings report, Wix reported a total revenue of $393M, which grew 14% YoY and exceeded expectations by 1.0%. Creative Subscription revenue contributed 74% and grew 11% YoY. Meanwhile, Business Solutions contributed the remaining 26% of the Total Revenue, while its growth outpaced total revenue growth by 22% YoY.

However, I believe the most promising figure is the growth in Partner Revenue, which grew 38% YoY to $119M, contributing 30% to Total Revenue. Wix characterizes Partner Revenue as “revenue that is generated through agencies and freelancers that build sites or applications for other users, as well as revenue generated through B2B partnerships, such as LegalZoom or Vistaprint, and enterprise partners.”

Growing its partner business is one of the key strategic initiatives for Wix, as its management outlined during its Analyst Day. Furthermore, the management was very optimistic during its Q3 earnings call regarding the launch of Wix Studio, where it has seen faster-than-expected adoption across Partners with thousands of Studio sites already live, generating Gross Payment Volume (GPV). Moving forward, I believe that Wix Studio will continue to drive compounded growth in Wix’s Partner business as more professionals come to Wix to build meaningful projects and generate GPV, especially as Wix builds on more Studio functionalities.

During the Q3 earnings call, Avishai Abrahami said the following, which reflects the management’s bullish stance on accelerating growth in its Partner business:

Feedback for Studio has also been fantastic and demonstrates the strong connection Partners have already begun to develop with the product. Partners have expressed the most excitement around Studio’s responsive design AI features, dedicated workflow management dashboard and Client Kit, with overall resounding appreciation for the intuitiveness of the platform. We also received many feature requests and ideas to make Studio even better, some of which we have already built and released. This active collaboration with the growing global community of professionals excited about Wix gives me confidence that we have an extended period of growth in this business ahead.”

At the same time, Wix is focused on rapidly ramping up its AI offerings. In Q3, Wix launched the AI Meta Tags Creator, which will generate optimized title tags and meta descriptions based on page content with little human supervision. At the same time, it also launched its AI Chat Experience tool, which is designed to generate tailored business recommendations pertaining to web templates, commerce applications, and other business needs. In my view, Wix’s robust product innovation pipeline to seamlessly integrate AI to help customers increase their business efficiency is going to drive higher conversion and monetization across both the Self Creator and Partner businesses over the coming years, as was already seen in higher Average Revenue Per Subscription (ARPS) in Q3 as users purchased higher priced subscription packages, attaching Business Solution products, helping Wix drive higher transaction-based revenue.

Wix management is laser-focused on expanding profitability

In Q3, Wix generated $1.10 per diluted share in Non-GAAP net income that exceeded expectations by 57%. Meanwhile, the company managed to streamline its non-GAAP operating expenses in order to expand its non-GAAP operating margin by 1600 basis points (b.p.) to 15%. Specifically, Wix was able to cut its Sales & Marketing (S&M) spending from 31% of Total Revenue in Q3 FY22 to 23% in Q3 FY23. While the S&M spending increased sequentially on a quarter-over-quarter basis due to marketing activities associated with the launch of Wix Studio, I believe the primary driver of the YoY decline in S&M is the company’s focused strategy to attract high-intent users, especially through its Partner business, which is driving higher ARPS coupled with a lower cost of acquisition.

Building the bear case

Macroeconomic uncertainty coupled with a competitive landscape

While the overall sentiment of US macroeconomic conditions is improving, there is still an underlying uncertainty about the health of small and midsize businesses that Wix primarily caters to. Given the pace of the aggressive interest rate hikes, there is a growing wall of worry pertaining to a possible slowdown in the US economy. Should we see a deterioration, or worse, a mild recession, in the broader economy, it could severely dampen Wix’s growth trajectory.

At the same time, the competitive landscape is fierce, with Shopify (NYSE:SHOP), Squarespace being the notable ones. While Shopify is primarily an e-commerce platform that allows users to create websites for their businesses, Squarespace is known for its elegant and visually appealing templates. Although the market size is large, with multiple players catering to different user needs, it is essential that Wix continually invest in R&D to drive innovation in order to maintain its competitive edge.

Tying it together: Wix is poised to drive sizable returns of 40%

Wix is estimated to grow its revenue by 12.5% YoY to $1560M in FY23. At the same time, Wix management has guided that non-GAAP operating expenses as a percentage of revenue will decrease to 53-54%, compared to its previous guidance of 56-57%. Moving forward, I believe that Wix should be able to grow its revenue in the low-teens over the next 5 years until FY28, as it drives growth across its Partner and Self Creator businesses by building innovative solutions that allow for more efficient conversion and monetization of users on its platform.

At the same time, per Wix’s Analyst Day, the management has shown its commitment to improving the company’s profitability by streamlining its non-GAAP operating expenses relative to revenue from 56.5% in FY23 to 52.5% in FY24, followed by 47.5% in FY25 and less than 45% after that. Assuming Wix’s non-GAAP gross margin improves from 68% to 72% over a 5-year period, the company should produce an estimated non-GAAP operating income of $743M in FY28 at a 27% margin. Assuming a discount rate of 10%, the present value of its FY28 non-GAAP operating income will be translated to $461M.

Taking the S&P 500 as a proxy, where it has grown its earnings by 8% on average over the last 10 years, with a forward price-to-earnings multiple in the range of 15-18, I believe that Wix should be trading at 1.5x the forward multiple of the S&P 500 in FY28, as the earnings start to grow at par with revenue as the company matures and realizes most of its operating leverage. That would translate to a price target of $180, representing an upside of 40% from its current levels.

Conclusion

I believe that Wix is undervalued at current levels, and given the company’s growth drivers focused on accelerating its Partner business while ramping its AI product pipeline, I believe the company will be able to drive higher conversion and monetization of users on its platform, leading to higher ARPS and transaction revenue. Although uncertainties remain about the overall state of macroeconomic conditions and the competitive landscape, I believe that Wix has thus far navigated through the currents quite impressively. Coupled with management’s commitment to drive growth profitably, I believe that Wix is poised to deliver sizable returns over a 5-year investment horizon.