ContextLogic Looks At Least 46% Undervalued Given Its Growth

ContextLogic (NASDAQ:WISH) is a fast-growing ecommerce company that makes money from B2C commissions on products sold through its website. Last quarter its revenue grew 75% year-over-year and its gross margins grew by 53.9%. I argued in my last article that WISH stock wouldn’t move much until the company became profitable. But now I’m starting to change my tune.

Since June 18 when I wrote that story the stock has actually moved down 16% from $11.40 to $9.58 on July 16. But I suspect that given its inherent growth, the stock could move higher over time. In essence, the market will be willing to anticipate profits down the road, given its huge growth rate.

So far this year, WISH stock is down $8.66 from $18.24 at today’s price, a year-to-date performance of negative 47.5%. That’s certainly nothing to celebrate. But WISH is also trading for less than 2 times its sales forecast for 2021. That makes ContextLogic particularly attractive now.

Estimating ContextLogic’s Value

Analysts reviewed by Yahoo! Finance estimate that sales for the year ending December 2021 will reach $3.15 billion. Seeking Alpha also reports that average analysts’ sales forecasts for 2021 are $3.2 billion. Since ContextLogic has a market capitalization of $5.924 billion, it is selling just below 2 times forward sales, around 1.87 times to be exact.

Moreover, estimates for 2022 are for sales at $3.78 billion, putting WISH stock on a forward price-to-sales (P/S) multiple of just 1.57 times. This is very cheap and unlikely to last

To start, some of WISH stock’s peers have higher P/S multiples. For example, Stitch Fix (NASDAQ:SFIX), another consumer discretionary website that sells clothes, trades on a forward 2021 P/S multiple of 2.83 times for 2021. For 2022, its P/S multiple is 2.39 times. These metrics are 51.3% and 80% higher than WISH stock’s metrics, respectively.  Keep in mind that SFIX stock has a similar market cap of $6.46 billion.

Another comparable is Revolve Group (NYSE:RVLV) which sells fashion clothes online. Its P/S multiples are 6.11 for 2021 and 5.1 for 2022. It also has a similar market cap of $5.12 billion. Those valuation metrics are 3.27 times and 3.25 times higher than ContextLogic’s counterparts.

However, Overstock.com (NASDAQ:OSTK), which has a $4.1 billion market value, trades for 1.30 and 1.16 times. These are cheaper metrics than WISH stock. However, the majority of other public e-commerce sites that take commissions like ContextLogic have higher value metrics.

Other examples are Shutterstock (NYSE:SSTK) at 5.0 and 4.63 P/S, and Stamps.com (NASDAQ:STMP), at 7.6 and 6.8 times 2021 and 2022 sales respectively.

The average of these sites is 4.6 times for 2021 and 4 times for 2022. These are 146% higher than ContextLogic’s 1.87 times 2021 and 155% higher than its 1.57 P/S ratios.

Where This Leaves WISH Stock

If we were to apply these multiples to WISH stock, its value should be at least 100% higher than today. For example, if we set its value at 4 times 2022 forecast sales, the market value should be 4 x $3.2 billion, or $12.8 billion. That is 115% higher than today’s $5.94 billion market cap. That implies that its price should be $20.64 (i.e., 2.155 x $9.58 = $20.64).

However, to be conservative, let’s just assume that WISH stock takes 2 years to reach this level. That means its average annual increase will be 46.6% on a compounded basis. That puts our price target for WISH stock at $14.04 per share over the next 12 months. Our target after that will be $20.64, up another 46.6% over $14.04.

On the date of publication, Mark R. Hake did not hold a position in any security mentioned in the 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 runs the Total Yield Value Guide which you can review here.