Why Wix’s stock dropped after today’s earnings report

Why Wix’s stock dropped after today’s earnings report

Stock drops after company posts another loss due to increased ad spend.

A picture of a stock chart with red and green blocks and the words "earnings report", with the Wix.com logo

Earlier this week, I wrote about how web presence companies like Wix and GoDaddy are ramping up advertising to capture increased demand for web building platforms during the pandemic. The upside is future earnings growth; the downside is short term depressed earnings.

Website building platform Wix (NASDAQ: WIX) reported Q3 earnings today and Wall Street was not impressed. Shares are trading down 6% at the time of posting while the NASDAQ is up.

It was definitely a mixed bag for the company, but a lot of the down numbers are due to that increased ad investment.

Wix’s topline numbers continue to be strong and exceeded the company’s guidance for the quarter.

Q3 revenue was up 29% year over year (Q2 was up 27% YoY). Collections (a Wix measure of cash sales) was up 36% year over year (Q2 was 33% YoY).

But free cash flow fell off a cliff due, in part, to the increased advertising investment. The company spent $37 million more on advertising in Q3 2020 than it did in the same quarter last year. While Wix anticipated the drop and it wasn’t as bad as its guidance, it’s still a stark change. Wix maintained strong free cash flow in Q2 (up 52% year over year) with increased marketing spend as well. The company expects suppressed free cash flow again in Q4, with total free cash flow this year of $122-$127 million, compared to $127 in 2019. It’s slightly higher ($3M) if you remove capital expenditures for the buildout of the future Wix HQ.

While the company is investing heavily to take advantage of the surge in interest in building websites due to the pandemic, it takes time for these investments to start paying back on free cash flow.

But growth in new users slowed during the quarter. The company added 7.8 million new users in Q3, compared to 9.3 million in Q2.

The number of paid subscribers increased by a net 302,000 during the quarter, compared to 346,000 in Q2.

Perhaps more frustrating for investors is that the company posted another net loss on Wix’s non-GAAP measure: ($8.0) million compared to positive $20.8 million in Q3 2019. (It also posted a non-GAAP loss in Q2). Its GAAP loss was ($56.8) million, compared to ($17.4) million in Q3 2019.

For investors that look only at current metrics, this sets off alarm bells.

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