Wix Q3: Surpassing 'Rule Of 40' Ahead Of Schedule

seekingalpha11-21 20:00

Wix's stock has surged 60% YTD, driven by strong ARPS growth and operating leverage. I am assigning a new price target of $254, indicating a 21% upside.The company’s Q3 FY24 revenue and earnings grew ...

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I am assigning a new price target of $254, indicating a 21% upside.The company’s Q3 FY24 revenue and earnings grew ...</p>\n\n<a href=\"https://seekingalpha.com/article/4739231-wix-q3-surpassing-rule-of-40-ahead-of-schedule\">Source Link</a>\n\n</div>\n","source":"seekingalpha","html":"<!DOCTYPE html>\n<html>\n<head>\n<meta http-equiv=\"Content-Type\" content=\"text/html; charset=utf-8\" />\n<meta name=\"viewport\" content=\"width=device-width,initial-scale=1.0,minimum-scale=1.0,maximum-scale=1.0,user-scalable=no\"/>\n<meta name=\"format-detection\" content=\"telephone=no,email=no,address=no\" />\n<title>Wix Q3: Surpassing 'Rule Of 40' Ahead Of Schedule</title>\n<style type=\"text/css\">\na,abbr,acronym,address,applet,article,aside,audio,b,big,blockquote,body,canvas,caption,center,cite,code,dd,del,details,dfn,div,dl,dt,\nem,embed,fieldset,figcaption,figure,footer,form,h1,h2,h3,h4,h5,h6,header,hgroup,html,i,iframe,img,ins,kbd,label,legend,li,mark,menu,nav,\nobject,ol,output,p,pre,q,ruby,s,samp,section,small,span,strike,strong,sub,summary,sup,table,tbody,td,tfoot,th,thead,time,tr,tt,u,ul,var,video{ font:inherit;margin:0;padding:0;vertical-align:baseline;border:0 }\nbody{ font-size:16px; line-height:1.5; color:#999; background:transparent; }\n.wrapper{ overflow:hidden;word-break:break-all;padding:10px; }\nh1,h2{ font-weight:normal; line-height:1.35; margin-bottom:.6em; }\nh3,h4,h5,h6{ line-height:1.35; margin-bottom:1em; }\nh1{ font-size:24px; }\nh2{ font-size:20px; }\nh3{ font-size:18px; }\nh4{ font-size:16px; }\nh5{ font-size:14px; }\nh6{ font-size:12px; }\np,ul,ol,blockquote,dl,table{ margin:1.2em 0; }\nul,ol{ margin-left:2em; }\nul{ list-style:disc; }\nol{ list-style:decimal; }\nli,li p{ margin:10px 0;}\nimg{ max-width:100%;display:block;margin:0 auto 1em; }\nblockquote{ color:#B5B2B1; border-left:3px solid #aaa; padding:1em; }\nstrong,b{font-weight:bold;}\nem,i{font-style:italic;}\ntable{ width:100%;border-collapse:collapse;border-spacing:1px;margin:1em 0;font-size:.9em; }\nth,td{ padding:5px;text-align:left;border:1px solid #aaa; }\nth{ font-weight:bold;background:#5d5d5d; }\n.symbol-link{font-weight:bold;}\n/* header{ border-bottom:1px solid #494756; } */\n.title{ margin:0 0 8px;line-height:1.3;color:#ddd; }\n.meta {color:#5e5c6d;font-size:13px;margin:0 0 .5em; }\na{text-decoration:none; color:#2a4b87;}\n.meta .head { display: inline-block; overflow: hidden}\n.head .h-thumb { width: 30px; height: 30px; margin: 0; padding: 0; border-radius: 50%; float: left;}\n.head .h-content { margin: 0; padding: 0 0 0 9px; float: left;}\n.head .h-name {font-size: 13px; color: #eee; margin: 0;}\n.head .h-time {font-size: 11px; color: #7E829C; margin: 0;line-height: 11px;}\n.small {font-size: 12.5px; display: inline-block; transform: scale(0.9); -webkit-transform: scale(0.9); transform-origin: left; -webkit-transform-origin: left;}\n.smaller {font-size: 12.5px; display: inline-block; transform: scale(0.8); -webkit-transform: scale(0.8); transform-origin: left; -webkit-transform-origin: left;}\n.bt-text {font-size: 12px;margin: 1.5em 0 0 0}\n.bt-text p {margin: 0}\n</style>\n</head>\n<body>\n<div class=\"wrapper\">\n<header>\n<h2 class=\"title\">\nWix Q3: Surpassing 'Rule Of 40' Ahead Of Schedule\n</h2>\n\n<h4 class=\"meta\">\n\n\n2024-11-21 20:00 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4739231-wix-q3-surpassing-rule-of-40-ahead-of-schedule><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>Wix's stock has surged 60% YTD, driven by strong ARPS growth and operating leverage. I am assigning a new price target of $254, indicating a 21% upside.The company’s Q3 FY24 revenue and earnings grew ...</p>\n\n<a href=\"https://seekingalpha.com/article/4739231-wix-q3-surpassing-rule-of-40-ahead-of-schedule\">Source Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","isBrief":false,"type":0,"news_type":1,"symbol":"BK4588","symbol_name":"碎股","start_time":0,"source_url":"https://seekingalpha.com/article/4739231-wix-q3-surpassing-rule-of-40-ahead-of-schedule","article_id":"2485462961","we_media_id":null,"thumbnails":["https://static.seekingalpha.com/cdn/s3/uploads/getty_images/648333668/image_648333668.jpg"],"rights":null,"url":"https://stock-news.laohu8.com/highlight/detail?id=2485462961","pubTimestamp":1732190400,"sourceInfo":{"source_id":"seekingalpha","name":"Seeking Alpha"},"weMediaInfo":null,"summary":"Wix's stock has surged 60% YTD, driven by strong ARPS growth and operating leverage. 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I am assigning a new price target of $254, indicating a 21% upside.The company’s Q3 FY24 revenue and earnings grew 13% and 52% YoY respectively, as user monetization remained robust with ongoing AI innovations in Wix Studio and the user onboarding process.Specifically, Wix's Partners business saw 30% YoY growth, fueled by higher-priced Studio subscriptions and deeper adoption of Business Solutions, particularly Wix Payments.Despite potential macroeconomic and competitive risks, Wix's momentum and efficiency gains position it to exceed the Rule of 40 ahead of schedule, making it a “buy”.   wavemovies  Introduction & Investment Thesis I last wrote about Wix (NASDAQ:WIX) in August, where I reiterated my “buy” rating with a price target of $200. Since then, the stock has climbed close to 30% and, with the latest Q3 FY24 earnings report, has surpassed my price target.   SA: Stock's performance since \"buy\" rating During the quarter, Wix continued to demonstrate momentum in its Partners business with adoption of both Wix Studio and Business Solutions across new and existing user cohorts, leading to higher ARPS (Average Revenue per User). In the meantime, the company continued to unlock operating leverage by streamlining its operating expenses, leading to an expansion in FCF (free cash flow) margin. With the management projecting to generate 27-28% in FCF margin in FY24, Wix is on a path to surpass the “Rule of 40” milestone this year, ahead of plan. Although the stock is up over 60% YTD, I believe there is still room for an upside after taking the latest management guidance into account. As investor sentiment improves with growing ARPS and operating leverage, I believe there is room for another 21% upside for the stock to a price target of $254. Growing monetization of user cohorts leading to outperformance in revenue growth Wix reported its Q3 FY24 earnings on November 20, where it generated a total revenue of $444.7M, growing 13% YoY. Out of the $447.5M in revenue, Creative Subscriptions contributed over 70% to Total Revenue, growing 10% YoY, while Business Solutions contributed the remaining 30% to Total Revenue, growing at a faster rate of 22% YoY. With a total of 278M registered users, Wix is seeing a strengthening top-funnel demand as they increase their acquisition marketing spend, resulting in a cohort size for Q3 that grew both on a QoQ (quarter over quarter) and YoY basis. Meanwhile, their Q1 FY24 user cohort continues to be the strongest non-Covid cohort, with bookings of $51.5M for the first three quarters, driven by an improving conversion rate of users into paid subscriptions as well as increasing ARPS from higher-priced Studio packages and a growing attach-rate from adopting more Business Solutions capabilities.   Q3 FY24 Earnings Slides: Growing monetization of user cohorts Plus, the management also emphasized that their older cohorts continue to perform above expectations, while estimating roughly $16.2B in future bookings over the next 10 years from the existing cohort as renewal activity remains stronger than anticipated despite price increases implemented on the platform throughout the year. I believe this demonstrates Wix’s ability to attract and retain high-intent users while driving robust product innovation to provide unmatched value on their platform. Strength in Partners Business from Studio with a robust product roadmap In my earlier posts on Wix, I had outlined that expanding its Partners business was one of the strategic initiatives for Wix. In Q3, the momentum in the Partners business continued, as revenue grew 30% YoY to $155.2M, contributing 35% to Total Revenue. The management defines Partner Revenue as follows: “Partners revenue is defined as revenue generated through agencies and freelancers that build sites or applications for other users (“Agencies”) as well as revenue generated through B2B partnerships, such as LegalZoom or Vistaprint (“Resellers”). Partners revenue includes revenue from both the Creative Subscriptions and Business Solutions businesses.” The strength in Partners business was a result of improved monetization driven by higher priced Studio subscriptions, along with adoption of Business Solutions that generated strong GPV (Gross Payment Volume) growth, as new and larger agencies and existing Partners built more projects on Wix. Particularly, when it comes to Studio subscriptions, Studio accounts contributed roughly 75% of bookings from new Partners in Q3, indicating that it will play a key role in growing the lifetime value of their Partners over the course of time.   Q3 FY24 Earnings Slides: Ongoing momentum in Partners business Meanwhile, Wix continues to drive superior product innovation as it builds innovative AI solutions to improve efficiency for its customers by helping them streamline their processes and build more effective relationships with their clients. With over 50% of new users creating their online presence on Wix through their AI-powered onboarding process, which includes the AI Website Builder, the company has a strong pipeline of new AI assistants in its product roadmap, which should pave the way for superior monetization of user cohorts in the coming years. Plus, they recently released their AI-powered visual sitemap and wireframe generator tool in Wix Studio that will allow agencies and enterprises to accelerate site planning, thus reducing friction and improving the likelihood of a higher conversion rate in the process. Growing adoption of Business Solutions as Wix onboards larger merchants While the revenue from Partners Business already consists of a portion of revenue from Business Solutions, I would like to spend a little bit of time here, as the segment is growing at more than twice the rate of Creative Subscriptions. One of the contributing factors to faster-growing Business Solutions revenue is the higher attach rate as users (both Partners and Self Creators) adopt solutions such as Email Marketing, Paid Ads, etc. The second contributing factor is the accelerating Transaction Revenue growth, which amounted to $54.3M, growing 23% YoY and contributing 43% to overall Business Solutions revenue. As the user base shifts towards higher-intent and more commerce-oriented users, strong transaction revenue is driven by accelerating GPV and increased monetization of GPV through initiatives such as Wix Payments.   Q3 FY24 Earnings Slides: Accelerating Transaction Revenue from onboarding larger merchants Accelerating towards “Rule of 40” ahead of expectations In Q3, Wix saw an improvement in its non-GAAP gross margins by 100 basis points to 69%, driven both by improvement in non-GAAP gross margins from its Creative Subscriptions and Business Solutions segment as they optimized their cost structure and ongoing AI integrations increased efficiencies, particularly in Customer Care and high-margin business applications. Meanwhile, Wix generated $88.4M in non-GAAP operating income, which grew 52% YoY, with a margin expansion of 500 basis points to 20%, driven by ongoing streamlining of operating expenses with non-GAAP R&D, S&M and G&A expenses amounting to 21%, 22%, and 6% of revenue, respectively, compared to 24%, 23%, and 7% of revenue a year ago. At the same time, as the company continues to drive higher user monetization by growing ARPS through a combination of both acquisition and retention strategies, it will continue to unlock operating leverage. The increasing business efficiency is also reflected in its FCF, which amounted to 29% of Total Revenue, with a sequential margin expansion of 170 basis points. With a projected 27-28% FCF margin in FY24, the company is set to exceed the Rule of 40, one year ahead of plan, as it drives booking momentum and cost efficiencies.   Q3 FY24 Earnings Slides: Set to reach \"Rule of 40\" one year ahead of schedule For investors who are new to SaaS investing, the definition of the Rule of 40 is that software companies are most efficiently run when the sum of their year-over-year growth rate percentage and their profit or free cash flow margin is at least 40%. Essentially, the Rule of 40 helps investors compare across software companies at different stages of growth to assess how efficiently they are being managed and therefore drive their investment decisions accordingly. Three risk factors to watch out for Although it looks like all the stars are aligned for Wix at the moment, I believe that there are at least three risk factors that investors should watch out for that may lead to short-term volatility for the stock ahead.  The state of the macroeconomic environment: In my previous posts, I had discussed the potential risk that Wix faces from its Self Creator user base in the event of a macroeconomic slowdown. While the overall economic sentiment is improving, there are risks to a downturn given the elevated level of the 10-year US Treasury bond yield. Meanwhile, the management also outlined that they will be “honing in on their Self Creator business with increased vigor” with new innovations that should accelerate growth in the coming years. Ultimately, similar to the growth in the Partners business from concentrated investments, investors would like to see a similar trend for the Self Creator business as the company allocates more of its resources in the area. The competitive landscape grows fiercer: With Shopify (SHOP) as one of the main competitors, that is 10x the market cap of Wix and is projected to grow at a faster rate over the next three years, we need to be paying attention to whether Wix loses a portion of its possible TAM (Total Addressable Market) to Shopify. Tougher comps ahead: Meanwhile, Wix will likely enter a period of tougher comps in FY25 after its superior results thus far in FY24. While the company has consistently beat investor expectations for earnings per share for the last four consecutive quarters, investor optimism has also gotten elevated as a result, as they expect similar outperformance in the coming quarters and years, leaving the stock exposed to potential drawdowns and volatility.  Incorporating the latest FY24 outlook into my valuation model With the latest updated guidance, the management has raised its outlook for total revenue in FY24 to grow 13% YoY to $1.76B. At the same time, Wix has received a total of nine upward revenue revisions in the last 90 days, which estimates it to be growing in the low to mid-teens the next four years to generate a total of $2.87B in revenue by FY28. This should be achievable as Wix continues to drive momentum in its Partners business from growing Studio and Business Solutions adoptions, leading to higher ARPS, while simultaneously reigniting growth in its Self Creator business through targeted AI innovations. From a profitability standpoint, Wix management has also raised its guidance for non-GAAP gross profit margin to 69% while expecting non-GAAP operating expenses to be equal to 49% of Total Revenue, down from 50% previously. This will translate to a non-GAAP operating income of $352M with a margin of 20%. Over the next 4 days, assuming that gross margins continue to improve to 72% and non-GAAP operating expenses amount to 45% of Total Revenue, as per the company’s long-term financial framework, it translates to $774M in non-GAAP operating income, with a margin of 27%. This will be equivalent to a present value of $569M in non-GAAP operating income when discounted at 8%. Taking a 1.5 times the price-to-earnings multiple of the S&P 500, where its companies grow their earnings on average by 8% over a 10-year period, we arrive at a PE ratio of 25, or a price target of $254, representing an upside of 21% from its current levels.   Author's Valuation Model My final verdict and conclusions As an existing investor in Wix, with shares up close to 30% since the time of my purchase, I will continue holding on to them and reiterate a “buy” rating on the stock. While the stock is up over 60% YTD, I believe that the price action is demonstrating improving investor sentiment that has room to run as the company demonstrates growth momentum through robust user monetization of its AI innovation, along with improving efficiency as it is set to reach the Rule of 40, one year ahead of schedule.  While the stock may face some short-term pressure as it enters an environment of tougher comps in FY25, along with operating in a highly competitive landscape, I believe that as long as the company can deliver ARPS growth with expanding operating leverage, investor sentiment will remain elevated, and the stock should continue to head higher with a price target of $254.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"1","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":"4.29.1","shortVersion":"4.29.1","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/2485462961"}