ContextLogic (NASDAQ:DESIRE) shares have fallen sharply since mine last article 16 dec also June 18th. I was deeply skeptical of WISH stocks and tried to warn readers that the stock was likely to fall. And today, I believe his decline is likely to continue.
On December 16, the WISH stock was at $ 3.11 and fell more than 15% to $ 2.53 at the close on January 13. I suspect she could continue to fall, given that her burning of money doesn’t seem to have slowed down.
No one should be surprised when management told WISH stock investors on November 10 that they would replace the CEO.
In addition, he was at work until a replacement was available. Since then, there have been no announcements of any replacement of the new CEO. I think they will have a hard time finding someone who would be willing to take on this new job.
Where things stand with ContextLogic
On November 10, the company announced that revenue for the quarter ending Sept. 30. revenue fell 39% year-on-year to $ 368 million. This included a 55% drop in its core market revenues.
More importantly, its free cash flow (FCF) was a negative $ 344 million for the third quarter. This represents more than 93% of its $ 368 million revenue for the quarter.
Such numbers will quickly lead the company to ruin. If almost 100% of the revenue disappears in cash, the company cannot progress.
This type of cash burnout reaches an annual cash burnout rate of $ 1.366 billion. But the company has only $ 1.315 billion in cash and securities on its balance sheet, up from $ 536 million in liabilities. So his net money is only $ 779 million.
This means that if a company does not turn its finances quickly or does not bring an infusion of cash, it may face some kind of insolvency.
Where could ContextLogic end up
The market knows that ContextLogic is approaching the point where it will have to borrow debt, raise more equity, or both. In any case, none of these options are good for shareholders.
The bottom line is that the company needs a cash infusion. Otherwise, ContextLogic’s revenue needs to grow rapidly and the company needs to become profitable in terms of cash flow.
This means that ContextLogic will either borrow a large sum of money or offer a secondary equity offer fairly soon, or both.
The possibility that these events could happen has lowered the share price. In addition, as I pointed out last time, the new CEO will want to give his stamp to the company. He is probably aware that drastic cuts will have to be made. This could cost more in terms of losses to be financed.
And things are actually worse than that. Due to the negative cash flow margins of the company, the higher the sales, the higher the losses will also grow. This is basically a death spiral for the company.
What to do with the WISH stock
The market may not yet have fully discounted the high level of potential dilution. For example, if a company has to raise $ 400 million, which is about a quarter of its market value of $ 1.688 billion, WISH shares could fall more than 25%. This is due to the “dump” factor, when people quickly get rid of their shares when they see that a company is in trouble.
In addition, if ContextLogic raises a lot of debt, it will reduce profits and cash flow due to interest costs. There is always the possibility that a company would go bankrupt if it does not withstand the additional debt.
Most investors are likely to wait for the company’s next earnings release for the fourth quarter and the increasingly important ContextLogic release. This will allow investors to deal with the options offered by the company.
At the date of publication, Mark R. Hake had no position (direct or indirect) in the securities mentioned in this article. The opinions expressed in this article are the opinions of the writer who are the subject InvestorPlace.com Guidelines for publication.