ContextLogic Stock Could Have One Last Spike Left, But Don’t Count on It
Meme stocks took the market by storm at the start of the year only to peak by February 2021. On Reddit’s subgroup, WallStreetBets (or WSB), ContextLogic (NASDAQ:WISH) stock defied reality when “wish” became a meme play.
Wishing WISH stock would become the next Amazon.com (NASDAQ:AMZN) ended in disappointment. Had WSB members shopped on the site, they would have realized the e-commerce firm did not have a moat.
When the lockdown due to the pandemic eased, ContextLogic lost its momentum. Shoppers who had a poor experience buying goods from the site did not return. Flush with cash from going public, the company boldly declared it would invest in the business.
WISH shares have one last, albiet remote, chance of spiking higher. After tax-loss selling, re-introductions of a partial lockdown could invite speculators to bet on the stock again.
WISH Stock Hurt By Q3 Results
In the third quarter, ContextLogic reported a loss of 10 cents a share. Revenue slumped by 39.3% year-on-year to $368 million.
Management implied its outlook is unclear, so it did not provide fourth-quarter revenue guidance. It knew enough to admit that revenue will fall below Q3 results despite the seasonally strong holiday period.
ContextLogic said ongoing reductions in ad spending in Q4, compared to Q3, will hurt revenue. It already experienced a 20% drop in revenue in Q4 through the end of October. Investors should expect a negative adjusted EBITDA in the range of a $30 million to $35 million loss.
Last month, Chief Executive Officer and company founder Piotr Szulczewski said he would step down but remain on the board. He laid the groundwork to grow Wish into a global e-commerce marketplace.
At a $2.2 billion market capitalization, the firm needs a seasoned veteran to grow the company from here.
Wish needs to reverse the monthly average user declines without depending on expensive advertising spending. It needs to strengthen its moat or risk losing to the bigger ecommerce players in the market.
For example, local pickup and local return could give customers a better experience than delivery. They could save on shipping costs compared to buying on eBay (NASDAQ:EBAY) or Amazon.com.
Wish is maximizing cost synergies related to its ship-to-home network. It is expanding its local logistic network. Already, 10% of its total orders are coming from local networks. In some countries, it is significant at 40%.
The firm needs to report higher network usage. Once it achieves economies of scale, it will cut its costs while increasing customer satisfaction.
Risks Abound
Local pickup will serve as a moat for Wish if competitors face higher delivery costs. The company still needs to hold sellers accountable for offering quality products. They need to give customers a better return policy.
If returns take too long to process or sellers fail to honor refunds, Wish will lose its customer’s trust.
In 2022, Wish may potentially reverse its adjusted EBITDA losses and turn a profit. Executives said on the conference call that they will invest in the business to improve the buyer experience. Still, it offered few details on what it will do to give a better shopping experience for customers.
After the stock collapsed from February highs, ContextLogic could buy back shares to lower the share float. Although it has higher expenses ahead required for operations, it also ended the quarter with $1.07 billion in cash and cash equivalents.
The bearish short float is almost 12%. A modest stock buyback would squeeze short-sellers and send the stock higher.
WSB speculators who sold the stock to book losses may buy the stock back. WISH shares could rally back to around $4.00 at the 50-day moving average.
In an unlikely scenario, thousands of WSB members could bid the stock to the 200-day simple moving average at around $8.00. WSB’s member count grew by almost 500,000 users in the last few months to 11.4 million. It will take only a few hundred buyers on WISH shares to send the stock higher, albeit briefly.
Your Takeaway
ContextLogic has a very bearish chart. The stock peaked at $32.85. When it found support at $8.00 in May, meme traders sent Wish shares to over $14.00.
The stock trended lower since June. Now that it is trading at around $3.60 (at the time of writing), penny stock traders may bet on a bounce.
The stock will need euphoric buying in technology stocks, particularly the beaten-down ecommerce companies.
On the date of publication, Chris Lau 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.
Chris Lau is a contributing author for InvestorPlace.com and numerous other financial sites. Chris has over 20 years of investing experience in the stock market and runs the Do-It-Yourself Value Investing Marketplace on Seeking Alpha. He shares his stock picks so readers get original insight that helps improve investment returns.
