Baron Funds: “WIX Trades at an Attractive Valuation”
Baron Funds, an investment management firm, released its "Baron Global Advantage Fund" third quarter 2023 investor letter, a copy of which can be downloaded here. During the third quarter of 2023, the Baron Global Advantage Fund®, denoted as the "Fund," experienced a 6.1% loss for its Institutional Shares. This performance can be compared to the 3.4% losses of the MSCI ACWI Index, known as the "Benchmark," and the 4.9% losses for the MSCI ACWI Growth Index, which serves as the Fund's benchmarks. Take a moment to review the fund's top 5 holdings to gain insights into their primary investment choices for 2023.
In its Q3 2023 investor letter, Baron Global Advantage Fund mentioned Wix.com Ltd. (NASDAQ:WIX) and explained its insights for the company. Wix.com Ltd. (NASDAQ:WIX) is a Tel Aviv-Yafo, Israel-based web development company with a $4.9 billion market capitalization. Wix.com Ltd. (NASDAQ:WIX) delivered a 12.89% return since the beginning of the year, while its 12-month returns are up by 22.78%. The stock closed at $86.73 per share on November 6, 2023.
Here is what Baron Global Advantage Fund has to say about Wix.com Ltd. (NASDAQ:WIX) in its Q3 2023 investor letter:
"Our biggest add in the quarter was Wix.com Ltd. (NASDAQ:WIX). Wix provides a cloudbased software to help micro-businesses build and maintain websites. We have been investors in Wix since 2017, and despite decelerating sales growth due demand pulling forward during the early days of COVID, which has impacted the share price, we believe the company is making significant progress towards profitability and expanding its opportunity in the partners (professional website development) segment. After years of penalizing nearterm profitability with investments in sales and marketing, the company is now taking advantage of its leading brand name to acquire incremental users mostly organically, which enabled it to improve non-GAAP operating margins by 21% year-over-year to 18% for the most recently reported quarter. During its Investor Day, the company further guided to FCF margin targets of 19% in 2024 and 25% in 2025, which we believe could prove conservative as the mix of revenues shifts over time to the partners segment, which is structurally more profitable than the do-it-yourself segment. This is namely because Wix only needs to acquire a partner once, while the partner serves as an external sales force for Wix, creating a highly effective subscriber acquisition channel. Additionally, businesses that hire partners tend to have less churn, have higher business volumes, and adopt additional modules from Wix to drive higher revenue per subscription. While the advancements in AI remain a risk to be cognizant of, we believe Wix will benefit from AI. The company has been investing in AI for over five years now. AI lowers the hurdles for starting new businesses and designing websites (through Wix’s AI site generator) makes existing businesses more successful over time. We believe that Wix trades at an attractive valuation with an FCF yield of over 5%, despite profitability being penalized due to reinvestments back into the partners segment, which investors value below zero (masking the profitability of the do-it-yourself segment). As the partners segment becomes profitable over the next few years, we believe Wix’s overall FCF will move much higher.
Our calculations show that Wix.com Ltd. (NASDAQ:WIX) does not belong on our list of the 30 Most Popular Stocks Among Hedge Funds. Wix.com Ltd. (NASDAQ:WIX) was in 31 hedge fund portfolios at the end of the second quarter of 2023, compared to 25 funds in the previous quarter. Wix.com Ltd. (NASDAQ:WIX) delivered a -8.58% return in the past 3 months. You can find other investor letters from hedge funds and prominent investors on our hedge fund investor letters Q3 2023 page.
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Disclosure: None. This article is originally published at Insider Monkey.
