Wix’s stock price has taken a beating over the past six months, shedding 51.9% of its value and falling to $65.45 per share. This might have investors contemplating their next move.

Is there a buying opportunity in Wix, or does it present a risk to your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.

Why Is Wix Not Exciting?

Despite the more favorable entry price, we're swiping left on Wix for now. Here are three reasons we avoid WIX and a stock we'd rather own.

1. Weak Billings Point to Soft Demand

Billings is a non-GAAP metric that is often called “cash revenue” because it shows how much money the company has collected from customers in a certain period. This is different from revenue, which must be recognized in pieces over the length of a contract.

Wix’s billings came in at $534.5 million in Q4, and over the last four quarters, its year-on-year growth averaged 13.1%. This performance slightly lagged the sector and suggests that increasing competition is causing challenges in acquiring/retaining customers.

2. Shrinking Operating Margin

While many software businesses point investors to their adjusted profits, which exclude stock-based compensation (SBC), we prefer GAAP operating margin because SBC is a legitimate expense used to attract and retain talent. This is one of the best measures of profitability because it shows how much money a company takes home after developing, marketing, and selling its products.

Analyzing the trend in its profitability, Wix’s operating margin decreased by 5.6 percentage points over the last two years. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability. Its operating margin for the trailing 12 months was breakeven.

3. Cash Flow Margin Set to Decline

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

Over the next year, analysts predict Wix’s cash conversion will fall. Their consensus estimates imply its free cash flow margin of 30.4% for the last 12 months will decrease to 24.2%.

Final Judgment

Wix’s business quality ultimately falls short of our standards. Following the recent decline, the stock trades at 1.6× forward price-to-sales (or $65.45 per share). While this valuation is fair, the upside isn’t great compared to the potential downside. We're fairly confident there are better stocks to buy right now. We’d recommend looking at a fast-growing restaurant franchise with an A+ ranch dressing sauce.

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