Deep Dive: Wish
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Show Notes
(Ryan) What they do: Wish is a mobile native e-commerce marketplace for cost-conscious consumers. Basically it’s like an Amazon with just stupidly cheap prices. Except the supply is sourced from merchants, so Wish just operates as the middle man. And it’s sometimes really stupid stuff, like a toothpick crossbow for $1.67. And the items take a while to ship. Believe the average is something like 22 days. Jumped up to 62 at the height of the pandemic. A lot of the items are sourced in China. I don’t think they give an exact number, but they say the majority of their merchants are located in china. Which is why shipping takes so long.
And Wish generates revenue by taking a 15% cut of each sale. So it’s not merchant fees. Although they do offer other merchant services, like Productboost which allows them to promote their offerings. Then they have logistics services that merchants pay for.
The company is HQ’d in San Francisco, but the majority of sales comes from Europe.
(Ryan) History: Peter Szulczewski was a Polish immigrant into Canada. He attended Waterloo University and before he graduated he interned at Google. He ended up moving down to Silicon Valley in 2003-04 and was an early employee there. He eventually moved to Google’s South Korean office where he learned some people like crowded search pages with more information and less the minimalist style of Google, which is a bit of a feature in Wish’s design.
He left in 2009 and spent the next 2 years on his own writing code and building what was called Contextlogic and it was designed to predict interests based on consumer’s habits and clicks. Initially it was supposed to be an advertising competitor to Google, and he got $1.7M in seed money and apparently the tech was considered really good. They even got an acquisition offer from Facebook at one point, but Peter eventually decided he wanted to go his own route and he brought in an old college friend to become co-founder and built Wish.
Went public in December of 2020 and reached north of a $15B valuation.
(Brett) Industry/Landscape/Competition:
E-commerce industry now over $4 trillion worldwide
Projected to continue growing steadily
There are a lot of competitors to Wish, including Amazon, Wal-Mart, and Target
However, the true competitors are more likely Ebay, Etsy, Mercari, Poshmark, and increasingly Instagram and Pinterest
(Brad) Management and Ownership:
CEO/Founder Peter Szulczewski 39 years old — lego dream of malls and looking
a) Raised in soviet-controlled communist Poland during the 80s where he had no access to goods or services Founded Wish to “help the underserved who have been neglected by existing ecommerce offerings”
— Sounds like he built an ecommerce site to serve as a treasure hunt for value conscious users
b) Worked as an Engineer with Google in their ad segment
Executive experience
a) CFO comes from Jasper Technology where he was the CFO (CFO at Kraft Canada as well)
b) GC is the former Zynga GC
Officers & directors owned 70% of voting power before offering
I’m sure that fell a little but not much
Peter has 57% of that voting power
Largest 6 funds = about 25% of the voting power
Most of this company is spoken for
(Brett) Valuation:
Market cap of $5.75 billion, ticker WISH
EV is $4 billion, however, one could argue that investors don’t have a claim on the cash since it will all be used to fund growth
P/S of 2
P/GP of 3.3
Unprofitable, looks like about 100 million options/RSUs ready to dilute the share count, current count at around 620 million
(Ryan) Earnings:
Q1 Revenue was up 75% YoY (Core marketplace revenue made up the most and grew at 40% YoY)
Logistics revenue grew by nearly 340%
They’re losing money. Net margin of -17% for Q1. Looks worse last year bc of IPO compensation
Had -$354M in FCF, but a lot of that was due to working capital adjustments
They had supply constraint issues with covid & shipping delays
Adjusted ebitda margin was -10%. Was -30% at one point according to the CC
S&M spend was 108% of gross profit
Users:
Total MAU’s declined 7% YoY to 101M (decreased ad spending in emerging markets and de-emphasized the really low priced items) will ramp up marketing again once they have better logistics.
Revenue per active customer grew 76% YoY (trying to target higher LTV customers and customers with better economics)
The percentage of orders above $20 increased 54% YoY (pay close attention to their wording)
Active buyers decreased 3% to 61M
(Brad) Balance sheet and liquidity:
a) Raised a whopping $1.1 billion dollars from a successful IPO
b) $1.62 billion in cash & equivalents
Doesn’t break it neatly into debt but liability items
c) Current liabilities for $1 billion
— payables/refunds/& every other accrued expense
d) 34 million in non-current liabilities (lease agreements)
e) New $280 million credit revolver as of 11/20 paying LIBOR +1.5% so pretty solid there on access to credit
f) Interest expense last Q was $0 — couple M in 2020
Used $354 million in cash from operations (same FCF number as well) vs. using $129 million YoY. It has a few quarters of cash on hand left unless those cash flow numbers improve
Anecdotal Evidence/Customer Stories:
(Ryan) Ya I downloaded the app and looked at some stuff. One of the things I saw were beats studios for $24. Retail is like $300.
(Brett) Downloaded the app, felt a bit gimmicky. I do worry about churn after someone gets one super good deal.
I used this service quite a bit in my undergraduate. Quality was never great but the prices were awesome & I was broke.
Competitive Advantages:
(Ryan) Scale. They’ve got more than 100 million consumers that come to the platform, more than 60M that are purchasing stuff. And that consumer data is critical for the platform. Most of the purchases that are being made on Wish are based on comments, reviews, and ratings. The more there is, the greater incentive for further purchases.
(Brett) Lock-in with logistics and advertisements. This is more on the merchant side, and can help keep merchants dependent on the Wish platform. Not sure if this is a competitive advantage now, but could be in the future
(Brad: Cost. Like everyone else they highlight the data flywheel they think they can enjoy as orders flow in. As it collect consumer data it should theoretically get better at predicting behavior. As a digitally native company this is an easier process than a dollar store trying to evolve
Future growth opportunities:
(Ryan) Quality assurance improvements or Wish local. The quality stuff will grow over time, but the verification thing was a good idea. Maybe an AR solution so they consumers can kind of vet the idea. As for Wish Local, that helps speed up the delivery time. They already have 50,000 partner pick-up stores. Doesn’t require any spend on real estate, but it improves the experience.
(Brett) Logistics services. This segment is growing quickly, albeit at lower gross margins. They also talk about a “logistics-as-a-service” segment, which I’m not sure what that will be or what they are referring to but something to watch as well. Logistics is basically merchants outsourcing fulfilment to Wish, like FBA. However, Wish does not have its own logistics network, which is why it looks like margins are extremely low right now.
(Brad) Quote from the S1: “We continue to evaluate our options for seeking additional licenses in several other jurisdictions to optimize our payment solutions and support the future growth of our business.”
Highlights and lowlights:
(Ryan) Highlights: Jackie Reses joined as the executive chair recently. Everything she’s touched has turned to gold. She was the lead at square capital and the chairman of square financial services. She was on the BOD of BABA and she’s a chairman on the federal reserve bank of san francisco. This could definitely be a profitable business. Lowlights: The deals on the website look too good to be true (aka fraudulent) and there’s a ton of macro risk.
(Brett) Highlights: Improving S&M spend, but still lots of room to go, and strong industry tailwind that has room for lots of winners, unique value proposition that is different than Amazon or other Western retailers (they are kind-of saying “yeah, this could be junk, it is sort-of like a giant garage sale”). Lowlights: LTM buyers stagnating since 2018 coupled with high S&M spend is a bad sign. S&M as a % of gross profit is down, which is what really matters. App feels gimmicky and was hard to navigate for me, it threw me four 50% off codes before I bought one item.
(Brad) Highlight is the value proposition. Prices were better here than anywhere else I looked at that was all that mattered to me in college. Feeds into the lowlight, as soon as consumers get any sense of disposable income it makes sense Wish would lose that user. Not sure how forecastable LTV is & churn may be an issue. Would mean marketing spend will have to continue to drive traffic
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Disclosure: The authors and podcast guests are not financial advisors. Brett Schafer and Ryan Henderson are portfolio managers at Arch Capital. Clients of Arch Capital may hold securities discussed on this podcast.