Wix.com Stock Is Estimated To Be Significantly Overvalued
- By GF Value
The stock of Wix.com (NAS:WIX, 30-year Financials) shows every sign of being significantly overvalued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus' estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $290.97 per share and the market cap of $16.4 billion, Wix.com stock is believed to be significantly overvalued. GF Value for Wix.com is shown in the chart below.
Because Wix.com is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth, which averaged 24.8% over the past five years.
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Companies with poor financial strength offer investors a high risk of permanent capital loss. To avoid permanent capital loss, an investor must do their research and review a company's financial strength before deciding to purchase shares. Both the cash-to-debt ratio and interest coverage of a company are a great way to to understand its financial strength. Wix.com has a cash-to-debt ratio of 1.11, which which ranks in the middle range of the companies in Software industry. The overall financial strength of Wix.com is 5 out of 10, which indicates that the financial strength of Wix.com is fair. This is the debt and cash of Wix.com over the past years:
It is less risky to invest in profitable companies, especially those with consistent profitability over long term. A company with high profit margins is usually a safer investment than those with low profit margins. Wix.com has been profitable 0 over the past 10 years. Over the past twelve months, the company had a revenue of $988.8 million and loss of $3.98 a share. Its operating margin is -19.96%, which ranks worse than 76% of the companies in Software industry. Overall, the profitability of Wix.com is ranked 2 out of 10, which indicates poor profitability. This is the revenue and net income of Wix.com over the past years:
Growth is probably the most important factor in the valuation of a company. GuruFocus research has found that growth is closely correlated with the long term performance of a company's stock. The faster a company is growing, the more likely it is to be creating value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth rate of Wix.com is 24.8%, which ranks better than 83% of the companies in Software industry. The 3-year average EBITDA growth rate is -22.8%, which ranks worse than 87% of the companies in Software industry.
Another method of determining the profitability of a company is to compare its return on invested capital to the weighted average cost of capital. Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. When the ROIC is higher than the WACC, it implies the company is creating value for shareholders. For the past 12 months, Wix.com's return on invested capital is -24.53, and its cost of capital is 10.39. The historical ROIC vs WACC comparison of Wix.com is shown below:
In short, The stock of Wix.com (NAS:WIX, 30-year Financials) shows every sign of being significantly overvalued. The company's financial condition is fair and its profitability is poor. Its growth ranks worse than 87% of the companies in Software industry. To learn more about Wix.com stock, you can check out its 30-year Financials here.
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This article first appeared on GuruFocus.
