ContextLogic: How Much Worse Can it Get?

ContextLogic (NASDAQ:WISH) stock has left most investors wishing that they’d never heard of the company in the first place. The e-commerce firm went public in December 2020 and appeared to have bright prospects. It was growing at a rapid clip and seemed to have a unique model that would earn it a solid place in the e-commerce field.

However, the company’s reputation and stock price both plunged in 2021. The company’s “treasure hunt” shopping experience became plagued with complaints about shoddy product quality. Meanwhile, the firm’s revenue growth abruptly stopped as it had to slash its marketing budget. Adding insult to injury, the CEO announced his departure late last year.

So, is there any hope left for WISH stock after falling more than 80%? Let’s start by looking at the company’s financial situation.

WISH Stock: ContextLogic’s Balance Sheet & Burn Rate

ContextLogic is past the point of anyone being optimistic on the business. Now it’s a question of whether WISH stock is going all the way to zero or not. Let’s take a closer look at the relevant factors.

As of its September 2021 quarter, ContextLogic has $1.2 billion of cash and short-term equivalents on its balance sheet. At first glance, that seems like a comfortable cushion. However, do note that the firm had nearly $500 million of current liabilities, leaving its usable funds significantly below that headline $1.2 billion figure.

Furthermore, not all of this cash is readily available to be spent under normal circumstances, however. Bears have pointed to a debt covenant which requires ContextLogic to hold onto a balance of $350 million of cash to remain in compliance. Companies do trip debt covenants from time to time, but it’s something that’s best avoided if at all possible.

So, realistically, the company had something like $700 million or $800 million of true excess liquidity heading into the holiday season. Even given the business’ structural problems, it hopefully did alright in Q4 thanks to holiday shopping. Now, though, the company’s cash burn is back into full effect as we enter 2022.

Based on recent results, ContextLogic has been generating operating losses of around $100 million per quarter. This would imply $400 million of annual losses. If the company has $700 million of available funds heading into 2022 and has to stay above $350 million to meet debt covenants, it has just around one year of ready liquidity left before it will need to raise funds. However, to ContextLogic’s benefit, its cost reduction strategy is working; last quarter, it lost just $64 million. At that rate, it would have substantially more time to enact a turnaround plan.

ContextLogic’s Road To Recovery

So, it seems ContextLogic should have funds to make it through 2022 and perhaps well into 2023 before running into too much trouble. That should keep a $0 stock price out of the picture for at least a little while. But is there anything here that will get the company back on the right track?

Arguably, the most important decision facing the company is its new CEO. The long-time CEO announced he was stepping aside in 2021. ContextLogic needs someone with a vision and differentiated strategy to help the firm stand out in the crowded e-commerce marketplace.

For awhile, it seemed simply having the cheapest prices would help ContextLogic find a niche. However, its hit-or-miss product quality hampered the business. Many consumers would buy one or two products from the company but not remain loyal customers for long. ContextLogic did try to prioritize higher-quality merchants among other efforts but it hasn’t found the right solution to balance price and quality yet.

Adding to its troubles, ContextLogic has been faced with far higher advertising costs. The company was able to grow quickly in 2020 thanks to cheap online ads. With so many businesses shut down during the pandemic, ad prices dropped. This allowed firms like ContextLogic to step in, buy cheap ads, and drive traffic to the app. This cycle broke down in 2021 as advertising became too expensive to generate a solid return on investment.

WISH Stock Verdict

Contextlogic’s new CEO, once selected, will have to face these dual problems of uneven product quality and rising customer acquisition costs. While ContextLogic has enough funds to keep the lights on for now, it needs a new leader desperately.

At this point, it’s simply impossible to speculate on where Wish will be in a year or two. If the company keeps pursuing the same strategy that got it here, WISH stock will remain in its slump.

However, shares could jump if the company can land a seasoned new executive. Currently, more than 10% of WISH’s stock has been sold short. This means that the potential is there for a big short squeeze if the company can turn sentiment around. But, for now, it’s a high-risk trade to buy ContextLogic. Perhaps the more prudent move is to wait and see who the new CEO will be before taking a position in the stock.

On the date of publication, Ian Bezek 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.

Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a sizable New York City-based hedge fund. You can reach him on Twitter at @irbezek.