Wix.com Ltd. (WIX, Financial) is a cloud-based web development platform that is up 13% year to date. The company recently released its fourth-quarter earnings report, where it beat both revenue and earnings expectations. Given management's strategic initiatives to drive revenue growth by building its Partners business and launching Wix Studio in 2023 while rapidly innovating on its artificial intelligence product offerings, I believe the company is positioned to drive higher conversion and monetization across its customer segments.
Further, I am impressed by management's financial discipline that it demonstrated in 2023 by streamlining its operating expenses and expanding its profitability. While uncertainties related to the macroeconomic environment and competition remain a concern, I believe the company is currently undervalued with an upside of at least 20% over a five-year investment horizon.
About Wix
Wix is a cloud-based web development platform that enables users to create websites and mobile applications without extensive coding skills, utilizing a user-friendly drag-and-drop interface and customizable templates. In terms of its business model, the company generates revenue through subscriptions and business solutions.
As of the fourth-quarter earnings report, 73% of Wix's revenue came from subscriptions, while the remaining 27% is attributed to Business Solutions, which includes e-commerce features. The company's growth strategy revolves around two primary drivers, which the management highlighted during its Analyst Day. The first growth driver is the Partners business, which saw 38% year-over-year growth in the fourth quarter with the introduction of its specialized product, Wix Studio. The second growth driver is AI, where Wix has extended a toolkit of AI capabilities that is aimed at helping customers create visual and written web content more easily, optimize design and manage their respective businesses more efficiently.
Building the bull case
The company's focus on scaling its Partners business and building AI capabilities should drive strong revenue growth. In its latest earnings call, Wix reported a total revenue of $403 million, which grew 14% year over year. Meanwhile, revenue for the full year grew 13% to $1.56 billion. Creative Subscription revenue and Business Solutions revenue grew 12% and 20%, respectively, while contributing 73% and 27% to total revenue for the quarter.
Digging one level deeper, one of the bright spots in an already stellar earnings report is the growth in the company's Partners revenue, which is primarily generated through agencies and freelancers who build sites and applications for other users. This segment grew 38% year over year to $130 million and 9% quarter over quarter. As we saw earlier, management had outlined that growing its Partners business is one of the strategic initiatives for the company.
Further, the commentary from Avishai Abrahami, co-founder and CEO of Wix, was highly encouraging and further demonstrates management's bullish stance on accelerating growth in its Partners business.
“Since August, more than 500,000 agencies and freelancers have created Studio accounts, and we currently have more Studio premium subscriptions than we expected to have at this point. Most notably, nearly half of our Studio accounts were created by new partners who had not created on Wix before. This strong start is a testament to the trailblazing innovation of Studio and our success in winning market share among our professionals and larger agencies. With all the feedback and our performance so far, I am confident that Studio is our most successful product to-date.”
At the same time, Wix is laser focused on driving AI innovation by rapidly building its suite of products, such as the AI chat experience for businesses and the AI Meta Tags Creator. In the fourth quarter, the company launched its AI site generator, which is designed to create ready-to-publish websites that are integrated with business applications based on user prompts. In fact, CEO Avishai Abrahami said the majority of new users on the platform are using at least one AI tool to build their websites, which demonstrates the company is on the right path in its product innovation pipeline to grow deeper adoption among its customers.
Moving forward, the company has guided for revenue to grow 11% to 13% year over year to $1.73 billion to $1.76 billion. I believe management's vision to grow revenue by actively building its Partners business and innovating rapidly with AI to elevate customers' business efficiencies will bring higher-intent users across the Partner and Self-Creator customer segments. This in turn will help Wix drive higher conversion and monetization of its customer segments over the coming years on its platform, with average revenue per subscription trending higher.
Management also remains committed to driving increased profitability. In the fourth quarter, Wix generated $74 million in non-GAAP net income that exceeded expectations by 27%. Meanwhile, the company grew its non-GAAP net income to $268 million for the full year, a huge improvement compared to a $10 million loss in 2022.
The company was able to achieve this by streamlining its non-GAAP operating expenses, which allowed it to grow its non-GAAP operating margin by 16%, compared to 9% the year before. Specifically, Wix was able to cut its sales and marketing spending from 28% of total revenue in 2022 to 25% in 2023. Plus, the company's reseearch and development expenditures declined from 34% to 31% of total revenue. In my opinion, one of the main reasons the company has been able to grow efficiently is because of its focused business strategy to attract higher-intent users across its customer segments, which has enabled the company to drive a higher conversion rate, leading to higher ARPS while expanding its operating leverage.
Building the bear case
The company has recently implemented a new pricing model that will be applied to all new and existing subscriptions. While management is confident about its decision as it has had success with raising prices in the past, coupled with a growing net retention rate from 102% in 2022 to 105% in 2023, I would be cautious here. I would like to point out Wix primarily caters to the small and medium-sized business target market, which is often the most affected when the macroeconomic environment deteriorates. While the overall sentiment about the state of the U.S. economy is improving, the SMB market is still cautious about spending. Should the economy weaken from here, I would expect a significant slowdown in business spending, which would dampen Wix's growth trajectory, especially when the company is raising its prices. Moving forward, I will be monitoring the trend in NRR very carefully to assess signs for possible churn, which will affect Wix's top-line projections.
Wix also operates in a highly competitive landscape, with Shopify (SHOP, Financial) and Squarespace (SQSP, Financial) being the most notable rivals. While each of these providers has its own unique selling points and competitive positioning, it is critical Wix continues to drive innovation to differentiate itself from its competitors, which requires the company to invest heavily in research and development. Meanwhile, if the price hikes backfire, coupled with a worsening in the U.S. economy, the company will be forced to cut down on its R&D spend to protect its margin, which may hurt its long-term competitive positioning.
Tying it together, Wix should see 20% upside from its current levels
For 2024, Wix management has guided for revenue to grow 11% to 13% year over year to between $1.73 billion and $1.76 billion. At the same time, management has guided that non-GAAP operating expenses as a percentage of revenue will decrease to 51% to 52%. Moving forward, I believe the company should be able to grow its revenue in the low teens over the next five years as it sees higher conversion and monetization of its Partner and Self-Creator customer segments on its platform, driven by its robust product innovation pipeline. Assuming the company is able to improve its non-GAAP gross margin from 68% to 70% over a five-year investment period while reducing its non-GAAP operating expenses relative to revenue to 45%, as it had outlined on its Analyst Day presentation, the company should be able to grow its non-GAAP operating margin from a projected 17% in 2024 to 25% in 2028, resulting in $686 million in non-GAAP operating income. Assuming a discount rate of 10%, the present value of its 2028 non-GAAP operating income will be equal to $426 million.
Taking the S&P 500 as a proxy, Wix should be trading at approximately 1.50 times the multiple of the S&P 500 in 2028, where S&P 500 companies have grown their earnings by 8% on average over the last 10 years. This would translate to a forward multiple of 22 to 23 as the company's earnings start to grow on par with revenue growth as the company matures and realizes most of its operating leverage. This would mean the stock is currently undervalued, with a possible upside of 20% over a five-year investment horizon to a price target of $167.
Conclusion
Given the growth drivers, I believe Wix is undervalued at current levels with a potential upside of at least 20% over a five-year investment horizon, as we see the company grow its revenue with a robust AI-driven product innovation pipeline as well as its focus on building its Partners business while expanding its operating leverage at the same time. While there are potential uncertainties related to the overall macroeconomic picture as well as competitive threats that may dampen Wix's growth trajectory, I believe there is reason for optimism at the moment, given the stock's current valuation.
