ContextLogic (NASDAQ:TO WISH) the stock has dropped dramatically since my last post on December 16 and also June 18. I was deeply skeptical of the WISH stock and tried to warn readers that the stock was likely to go down. And today, I think its decline is likely to continue.
On December 16, WISH stock was at $ 3.11 and it fell more than 15% to $ 2.53 at the January 13 close. I suspect it may continue to decline, given that its cash consumption does not appear to have slowed.
It shouldn’t have come as a surprise when management told WISH stock investors on November 10 that the CEO was to be replaced.
In addition, he was retained until a replacement was available. Since then, there has been no announcement regarding the replacement of a new CEO. I think they will have a hard time finding a loan to take on this recovery work.
Where is it with ContextLogic
On November 10, the company announced that revenue for the quarter ending September 30 fell 39% year-over-year to $ 368 million. This included a 55% drop in its Core Marketplace revenue.
But more importantly, its free cash flow (FCF) for the third quarter was negative at $ 344 million. This represents more than 93% of its $ 368 million in revenue for the quarter.
Running numbers like this will quickly ruin a business. If almost 100% of the revenue is spent on cash burn, there is no way the business can move forward.
This type of cash consumption is equivalent to an annualized cash consumption rate of $ 1.376 billion. But the company only has $ 1.315 billion in cash and securities on its balance sheet, and that’s before $ 536 million in liabilities. Its net cash position is therefore only $ 779 million.
This implies that if the business does not quickly turn around its finances or bring in liquidity, it could face some kind of insolvency.
Where ContextLogic could be found
The market knows that ContextLogic is approaching a point where it will either need to borrow debt, raise more equity, or both. Either way, none of these options are good for shareholders.
The bottom line is that the business needs an injection of cash. Or ContextLogic’s revenue must grow rapidly and the business must become profitable from a cash flow perspective.
This implies that ContextLogic will either borrow a large sum of money, or make a secondary stock offering fairly quickly, or both.
The possibility of these events occurring has depressed the share price. In addition, as I pointed out last time, the new CEO is going to want to leave his mark on the company. He probably realizes that some drastic cuts will have to be made. This could cost more in terms of losses, which will need to be funded.
And things are actually worse than that. As a result of the company’s negative cash margins, the more its sales increase, the more its losses increase. It is essentially a death spiral for the company.
What to do with WISH Stock
The market may not yet have fully considered a high degree of potential dilution. For example, if the company needs to raise $ 400 million, which is about a quarter of its $ 1.688 billion market value, the WISH stock may fall more than 25%. This is because of the “dump” factor, where people quickly dump their stocks once they see the business is in trouble.
Also, if ContextLogic goes into debt a lot, it will reduce profits and cash flow due to interest charges. There is always the possibility that the business will go bankrupt if it cannot handle the additional debt.
Most investors will likely wait for the release of the company’s fourth quarter results and any major announcements made by ContextLogic. This will allow investors to face the options offered by the company.
As of the publication date, Mark R. Hake does not hold any position (direct or indirect) in any of the titles mentioned in this article. The opinions expressed in this article are those of the author, subject to the InvestorPlace.com Publication guidelines.
Mark Hake writes about personal finance on mrhake.medium.com and Newsbreak.com and run the Total Value of Return Guide that you can consult here.