Wix.com: This Is The Website Hosting Winner, And It's Trading At Great Value

seekingalpha09-26 03:32

I'm initiating Wix.com with a buy rating, given the company's excellent growth/profitability balance.New AI website-building features are helping Wix's bookings growth hit the high teens by the second...

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And yet, Wix.com (NASDAQ:WIX) has taken the industry by surprise this year by showcasing accelerating bookings growth, driven by a number of new product introductions including and especially AI features. Now, amid a sky-high S&P 500 and the risk that valuation multiples might get knocked down a peg, is a great time to focus on \"growth at a reasonable price\" stocks like Wix. Year to date, shares of Wix have already shot up roughly 40%: but in my view, there's still plenty of juice left in this rally. Data by YCharts Wix.com is my preferred choice in the website-hosting industry, and I'm initiating the stock at a buy rating. I recently wrote a sell rating on industry competitor GoDaddy.com (GDDY), which has the unfortunate distinction of growing at a much slower pace than Wix while also trading at a more expensive revenue multiple. To me, now is a great time to buy Wix as the company is experiencing AI-driven bookings acceleration. Bookings acceleration to lead to FY25 revenue acceleration Reason number one to invest in Wix now: the company is experiencing a renewed surge in growth, powered in large part by AI. The chart below clearly shows a step-function change in bookings activity for Wix starting in Q1 of this year, and in the most recent quarter, Wix's bookings grew at a 15% y/y pace. Wix.com bookings (Wix.com Q2 earnings deck) One note here: Wix.com recognizes bookings when the company transacts with customers, but revenue is recognized over time as subscription services are used. In other words, bookings is a forward-looking indicator for future revenue growth. The company's mid-teens bookings growth rate is also much stronger than the 8.6% y/y bookings growth pace that it achieved in FY23, and just 3.7% y/y growth in FY22. Wix is touting new AI features that can help create a website \"in minutes,\" according to its own website. Using a chat-based prompt, website creators can direct Wix's AI assistant on what themes to use or images to generate, and it can also help with writing website copy as well. Wix's AI tools are included in all of its website building packages, which start at $17 per month. Wix subscription tiers (Wix.com) Unlike many other companies that are merely paying lip service to AI as a buzzword, Wix's AI tools appear to be supercharging bookings. Speaking to the impacts that AI has had on the company's business on the recent Q2 earnings call, founder and CEO Avishai Abrahami noted as follows:  Second, we continue to build up our suite of AI capabilities as a result of the numerous AI initiatives and work streams across weeks. Last quarter, we introduced our plan to embed AI assistance across our platform and products. I'm excited to share that we have released 17 AI business assistants so far to-date. These assistants span a wide range of use cases to support users with minimal hands-on support, thus streamlining their experience. These conversational AI assistants act as a right-hand aid for users to guide them through the entire lifecycle of ideating, creating, and managing their online presence. Our offering includes an analytics assistant that can help Wix users find the data they need without having to search through dozens of reports, and an assistant that helps users create events through a conversational chat. We have already received positive feedback on this first set of AI assistants with dozens more set to launch later this year. Additionally, on the AI front, we launched AI creation capabilities for our mobile app builder in June. This new solution enables users to create and edit iOS or Android apps through an AI chat experience.\"  We note as well that the company recently lifted its full-year revenue outlook (to 12-13% y/y growth) and its full-year bookings growth (to 13-14% y/y growth), both one point stronger at the low end of the range versus the outlook it gave in Q1. Wix.com outlook (Wix.com Q2 earnings deck) Wix is also expecting its bookings growth to accelerate to 16% y/y growth in 2H'24 (versus 15% growth in Q1). It's also reminding us that the acceleration to a mid/high teens bookings growth pace this year is a precursor to accelerated revenue growth next year (consensus is currently calling for 14% growth). Economies of scale Wix's outsized growth is also leading to significant economies of scale. Gross margin, as shown in the chart below, is expected to increase to a 68-69% range this year. The company has increased its take rates and wallet share of customer activity, in particular by achieving higher attach rates on its payment processing tools. Wix.com cost efficiencies (Wix.com Q2 earnings deck) Meanwhile, also as shown above, opex in Q2 reached just 48% of revenue, three points lower than the year-ago quarter. Overall pro forma operating margins in Q2 hit a respectable 21%, up three points y/y versus 18% in Q1. It's worth noting here that with 21% margins on top of 15% top-line growth (as measured by bookings), Wix is very close to hitting the so-called \"Rule of 40\" that indicates excellent growth/profitability balance. We think there's plenty of room for Wix to scale further and achieve additional operating leverage, especially as at the moment, Wix is primarily a domestic company with 60% of its revenue in North America. Europe, in particular, only represents 25% of its total revenue and is growing two points faster than North America. Wix.com geographical distribution (Wix.com Q2 earnings deck) Margin expansion this year has also led to significantly expanded FCF expectations, with the company guiding to $460-$470 million in free cash flow this year: nearly doubling y/y versus just $246 million in FY23, and with FCF margins gaining ~10 points of leverage to a range of 26-27% margins. Wix.com FCF (Wix.com Q2 earnings deck) Reasonable top and bottom-line valuation, cheaper revenue multiple versus other web hosting peers In spite of these strengths, Wix still trades at a reasonable valuation: a perfect example of the \"growth at a reasonable price\" play that I favor. At current share prices near $165, Wix trades at a market cap of $9.01 billion. After netting off the $801.2 million of cash, cash equivalents and marketable securities against $571.3 million of convertible debt on Wix's latest balance sheet, its resulting enterprise value is $8.78 billion. Meanwhile, for next fiscal year (FY25), Wall Street analysts are expecting Wix.com to generate $6.97 of pro forma EPS (+19% y/y) on revenue of $1.97 billion, or 14% y/y growth. If we conservatively assume no further FCF margin expansion next year (a 27% margin), FCF on this revenue profile will be $532 million (+14% against the midpoint of this year's guidance). This puts Wix's valuation multiples at:   4.4x EV/FY25 revenue (cheaper than peers) 16.5x EV/FY25 FCF  23.7x FY25 P/E (barely at a premium to the S&P 500, despite AI-driven growth drivers and expected ~20% earnings growth)  I'll expound on the valuation discount relative to peers. As previously mentioned, despite superior growth rates, the company trades at a cheaper revenue multiple than GoDaddy (which is growing at a mid-single digits pace). Wix is also trading cheaper than Squarespace, whose stock is reflecting an accepted buyout offer from British buyout firm Permira. Data by YCharts Risks and key takeaways Of course, we should be mindful of a number of risks that are in the way of the bull thesis for Wix. The sustainability of its current bookings growth pace is probably my biggest concern. After all, website building and hosting is relatively commoditized, and even slower-growing rivals like GoDaddy are also touting their own AI-assisted features. After that, there's also the risk that worsening macro conditions may increase small/mid-sized business failure rates, which would increase Wix's churn.  That being said, I see much more upside than downside for Wix, especially with its upbeat outlook calling for bookings acceleration on top of its very reasonable valuation multiples. Look for a buying opportunity here.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"analysis","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.28.1","shortVersion":"4.28.1","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2470979952"}