Wix has had an impressive run over the past six months as its shares have beaten the S&P 500 by 6.7%. The stock now trades at $83.40, marking a 18.4% gain. This was partly due to its solid quarterly results, and the run-up might have investors contemplating their next move.

Is now the time to buy Wix, or should you be careful about including it in your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.

Why Is Wix Not Exciting?

We’re glad investors have benefited from the price increase, but we’re sitting this one out for now. Here are three reasons you should be careful with WIX, plus one stock we’d rather own.

1. Weak Billings Point to Soft Demand

Billings is a non-GAAP metric that is often called “cash revenue” because it shows how much money the company has collected from customers in a certain period. This is different from revenue, which must be recognized in pieces over the length of a contract.

Wix’s billings came in at $569.1 million in Q2, and over the last four quarters, its year-on-year growth averaged 13.9%. This performance slightly lagged the sector and suggests that increasing competition is causing challenges in acquiring/retaining customers.

2. Shrinking Operating Margin

Many software businesses adjust their profits for stock-based compensation (SBC), but we prioritize GAAP operating margin because SBC is a real expense used to attract and retain engineering and sales talent. This is one of the best measures of profitability because it shows how much money a company takes home after developing, marketing, and selling its products.

Analyzing the trend in its profitability, Wix’s operating margin decreased by 17.5 percentage points over the last two years. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability. Wix’s performance was poor no matter how you look at it - it shows that costs were rising and it couldn’t pass them onto its customers. Its operating margin for the trailing 12 months was negative 9.8%.

3. Cash Flow Margin Set to Decline

Free cash flow isn’t a prominently featured metric in company financials and earnings releases, but we think it’s telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

Over the next year, analysts predict Wix’s cash conversion will fall. Their consensus estimates imply its free cash flow margin of 22.9% for the last 12 months will decrease to 19%.

Final Judgment

Wix isn’t a terrible business, but it isn’t one of our picks. With its shares beating the market recently, the stock trades at 1.6× forward price-to-sales (or $83.40 per share). This valuation multiple is fair, but we don’t have much faith in the company. We’re fairly confident there are better investments elsewhere. Let us point you toward the Amazon and PayPal of Latin America.

Stocks We Like More Than Wix

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