ContextLogic (NASDAQ:TO WISH) left most investors wishing they had never heard of the company in the first place. The e-commerce company went public in December 2020 and seemed to have bright prospects. It was growing at a rapid pace and seemed to have a unique model that would earn it a solid place in the e-commerce arena.
However, the company’s reputation and share price have both plummeted in 2021. The company’s “treasure hunt” shopping experience has been plagued by complaints about the poor quality of products. Meanwhile, the company’s revenue growth came to an abrupt halt as it had to cut its marketing budget. Adding insult to injury, the CEO announced his departure at the end of last year.
So, is there any hope for WISH stock after falling more than 80%? Let’s start by looking at the company’s financial situation.
Stock WISH: ContextLogic’s Balance Sheet and Burn Rate
ContextLogic has moved beyond anyone’s optimism about the business. Now it comes down to whether the 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, it looks like a comfortable cushion. However, note that the company had nearly $500 million in current liabilities, leaving its usable funds well below that overall figure of $1.2 billion.
Moreover, all of this money is not readily available to spend under normal circumstances. The Bears pointed to a covenant that requires ContextLogic to maintain a $350 million cash balance to remain compliant. Companies do breach debt covenants from time to time, but this is something best avoided if possible.
So realistically the company had about $700 million or $800 million of genuine excess cash before the holiday season. Even given the company’s structural issues, we hope it did well in the fourth quarter thanks to holiday shopping. Now, however, the company’s cash burn is back in full force as 2022 dawns.
Based on recent results, ContextLogic generated operating losses of approximately $100 million per quarter. This would imply $400 million in annual losses. If the company has $700 million in funds available through 2022 and needs to stay above $350 million to meet debt covenants, it only has about a year of cash left before it needs to raise funds. . However, to ContextLogic’s advantage, its cost-cutting strategy is working; in the last quarter, it lost only $64 million. At this rate, he would have much more time to adopt a recovery plan.
The Path to ContextLogic Recovery
So it looks like ContextLogic should have funds to survive until 2022 and maybe until 2023 before running into too many problems. 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 track?
Arguably, the most important decision facing the company is its new CEO. The longtime CEO has announced he is stepping down in 2021. ContextLogic needs someone with a vision and a differentiated strategy to help the company stand out in the crowded e-commerce marketplace.
For a while, it seemed like just having the cheapest prices would help ContextLogic find a niche. However, its haphazard product quality hampered the business. Many consumers would buy one or two products from the company but would not remain loyal customers for long. ContextLogic has tried to prioritize higher quality merchants among other efforts, but has yet to find the right solution to balance price and quality.
In addition to its problems, ContextLogic faced much higher advertising costs. The business was able to grow rapidly in 2020 thanks to cheap online advertisements. With so many businesses closed during the pandemic, ad prices have plummeted. This allowed companies like ContextLogic to step in, buy cheap ads and drive traffic to the app. This cycle broke in 2021 as advertising became too expensive to generate a solid return on investment.
WISH Stock Verdict
The new CEO of Contextlogic, once selected, will have to deal with this double problem of uneven product quality and rising customer acquisition costs. While ContextLogic has enough funds to keep the lights on for now, it desperately needs a new leader.
At this point, it’s simply impossible to speculate where Wish will be in a year or two. If the company continues to pursue the same strategy that brought it here, WISH stock will remain in its doldrums.
However, shares could jump if the company can bring in a new seasoned executive. Currently, more than 10% of WISH shares have been sold short. This means that there is potential for a strong compression in the near term if the company can reverse the trend. But, for now, it’s a high-risk trade to buy ContextLogic. Perhaps the most prudent decision is to wait and see who the new CEO will be before taking any action.
As of the date of publication, Ian Bezek had (neither directly nor indirectly) any position in the securities mentioned in this article. The opinions expressed in this article are those of the author, subject to InvestorPlace.com publishing guidelines.
Ian Bezek has written over 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a junior analyst for Kerrisdale Capital, a major New York-based hedge fund. You can reach him on Twitter at @irbezek.