Wix.com Inc. (WIX), a Tel Aviv-based web development platform targeting small businesses, has soared nearly 70% so far this year and 250% over the past 52 weeks. While the company is not profitable, its four-year compounded annual revenue growth rate stands at an enviable 38% with nearly 100 million users on its platform. The company’s history of beating earnings and achieving breakneck growth has led to its premium valuation.
After its recent move higher, the stock trades with a price-sales ratio of nearly 10x compared to an industry average of just 7x. The market for web development platforms is also becoming saturated with competitors like Shopify, Squarespace, and WordPress. WIX has benefited from its freemium business model (only ~3% of users are paying customers), but free customers bleed cash unless they’re converted into paying customers.
Raymond James recently downgraded Wix from Outperform to Market Perform due to these valuation concerns following its 250% rise over the past 52 weeks.
On a technical level, Wix faces a rising wedge chart pattern that could signal a bearish reversal. The stock attempted to breakout from its upper trend line and R2 resistance at $77.13, but has since moved lower toward its R1 resistance at $72.52. A breakdown from these levels could test lower trend line support at around $70 and a move below those levels could lead to a move to the 50-day moving average at $64.94 or S1 support at $61.87.
Wix is expected to report its first quarter earnings on May 3, which is an important day for traders and investors to watch. If it surpasses expectations, as it has done in the past, the stock could rally further. But, a failure to meet expectations could lead to a significant downturn as analysts become increasingly concerned over the company’s lofty valuation. The upshot is that it seems the company is well-capable of growing into its valuation over time.
Charts courtesy of StockCharts.com. Author holds no position in stocks mentioned.