ContextLogic: How much worse can it be?

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ContextLogic (NASDAQ:DESIRE) the shares left most investors wishing they had never heard of the company. The e-commerce company went public in December 2020 and seemed to have nice opportunities. It has grown rapidly and seemed to have a unique model that will earn it a solid place in e-commerce.

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However, both the company’s reputation and the share price declined in 2021. The company’s shopping experience with “treasure hunt” has become imbued with complaints about poor product quality. Meanwhile, the company’s revenue growth came to a sudden halt as it had to cut its marketing budget. In addition to insulting the injury, the CEO announced his departure late last year.

So is there any hope left for WISH shares after falling more than 80%? Let’s start with the financial condition of the company.

WISH stock: ContextLogic balance sheet and combustion rate

ContextLogic is past the point that anyone would be optimistic about the business. Now the question is whether WISH shares go all the way to zero or not. Let’s take a closer look at the relevant factors.

As of the September 2021 quarter, ContextLogic has $ 1.2 billion in cash and short-term equivalents on its balance sheet. At first glance, this seems like a comfortable pillow. Note, however, that the company had nearly $ 500 million in current liabilities, making its working capital well below the $ 1.2 billion headline.

Moreover, under normal circumstances, not all of this money is easily available for spending. The Bears have pointed to a debt commitment that requires ContextLogic to keep a $ 350 million cash balance to stay in line. Businesses occasionally enter into debt commitments, but this is best avoided if at all possible.

So, realistically, the company had a little over $ 700 million or $ 800 million of real excess liquidity set aside for the holiday season. Also given the company’s structural problems, hopefully it was good in the fourth quarter, thanks to holiday shopping. Now, however, the company’s monetary spending is again in full swing as we enter 2022.

According to recent results, ContextLogic generates operating losses of approximately $ 100 million per quarter. That would mean an annual loss of $ 400 million. If a company has $ 700 million in available funds by 2022 and needs to stay above $ 350 million to meet debt commitments, it only has about a year of liquidity ready before funds can be raised. However, in favor of ContextLogic, its cost-cutting strategy works; it lost only $ 64 million in the last quarter. In this case, I would have significantly more time to implement the turnaround plan.

ContextLogic’s path to recovery

Therefore, it seems that ContextLogic should have the means to survive until 2022 and perhaps even until 2023, before encountering too many problems. This should at least prevent the $ 0 share price from being out of the picture for a while. But is there anything here that will get the company back on track?

Probably the most important decision the company faces is its new CEO. The longtime CEO has announced that he is retiring in 2021. ContextLogic needs someone with a vision and a differentiated strategy to help the company stand out in the crowded e-commerce market.

For a while, it seemed that simply the lowest ContextLogic prices would help find a niche. However, its product quality has hampered business. Many consumers would buy one or two products from a company, but they would not stay loyal customers for long. Among other efforts, ContextLogic has tried to give preference to higher quality retailers, but has not yet found the right solution to balance price and quality.

In addition, ContextLogic faced much higher advertising costs. The company was able to grow rapidly in 2020 due to cheap online ads. Because so many companies have closed during the pandemic, ad prices have fallen. This has allowed companies like ContextLogic to enter, buy cheap ads and drive traffic to the app. This cycle was interrupted in 2021 as advertising became too expensive to generate a solid return on investment.

WISH share ruling

The new CEO of Contextlogic, once elected, will have to face these two problems of uneven product quality and rising customer acquisition costs. While ContextLogic has enough resources for now to keep the lights on, it desperately needs a new leader.

At this point, it’s simply impossible to guess where Wish will be in a year or two. If the company continues with the same strategy as it got here, WISH shares will remain in decline.

However, stocks could jump if the company could get an experienced new director. Currently, more than 10% of WISH shares are sold short. This means there is the potential for a big short-lived if the company can change the mood. But for now, buying ContextLogic is a very risky trade. It may be a more prudent move to wait and see who the new CEO will be before taking a position in the stock.

At the date of publication, Ian Bezek did not hold (directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the author and are the subject of InvestorPlace.com Guidelines for publication.

Ian Bezek has written more than 1000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a junior analyst for Kerrisdale Capital, a large hedge fund based in New York City. You can reach him on Twitter at @irbezek.

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