JPMorgan Defends Wix Amid Rout as CFO Plots Next Super Bowl Ad

Updated on Ltd.’s decision to splurge on a Super Bowl ad earlier this year resulted in the Israeli Internet company attracting a record number of new users last quarter. Investors responded by dumping its shares.

Wix, which provides free online tools to build websites, added a record 5 million new users, while the number of paying subscribers rose almost 50 percent from a year ago to 1.5 million. Even so, it only met second-quarter sales guidance, and didn’t raise the forecast for the rest of the year. That was enough to spark a 23 percent rout in the stock last week, wiping out $248 million of market value.

With Internet stock valuations near the highest in at least 10 years, traders are punishing technology companies that show anything less than robust growth. That’s making it hard for Wix, a startup that went public less than two years ago and has yet to turn a profit, to catch a break from investors, according to Bruce Schoenfeld, research director at New York-based BlueStar Global Investors.

“If growth is not accelerating as fast as people want it, or God forbid slowing, then investors will sell first and then re-look,” said Schoenfeld, whose company designs indexes to invest in Israeli companies. “The earnings were actually pretty good.”

Wix’s revenue rose 43 percent to $48.6 million in the second quarter. It had a net loss of $12.3 million, compared with the $12.9 million average estimate of eight analysts.

Brett Favre

The Tel Aviv-based company used National Football League legends such as former quarterback Brett Favre in a 30-second Super Bowl commercial last year. The ad cost Wix somewhere between $4 million and $6 million, JPMorgan Chase & Co. estimated at the time, about 10 percent of revenue in the fourth-quarter of 2014.

Wix was the worst performer on the Bloomberg Israel-US Equity Index in the five days through Aug. 7 after Caesarstone Sdot-Yam Ltd., the maker of quartz counter tops that reduced its 2015 revenue forecast last week, spurring a 25 percent decline. The index dropped 1.8 percent. Wix rose 3.5 percent to $22.30 at 10:31 a.m. in New York on Monday.

JPMorgan analysts, who defended Wix’s Super Bowl ad spending in February, again came out in favor of the company, arguing that it added more new subscribers than anticipated, and became profitable on an adjusted basis for the first time, something the company had said wouldn’t happen until the second half of 2015.

Currency Headwinds

“We believe this is the wrong interpretation as we see the business momentum being very strong,” JPMorgan analysts led by Sterling Auty wrote in an Aug. 5 note.

Wix expects revenue to reach as much as $203 million this year, a 43 percent increase from 2014. Adjusted earnings before income, taxes, depreciation and amortization will be as much as $12 million in 2015, compared with an earlier forecast of as much as $9 million, the company said last week.

Wix, which gets about half its revenue from outside North America, would have had higher adjusted earnings if not for currency depreciation in places like Russia and Brazil, Chief Financial Officer Lior Shemesh said in a telephone interview. Currency headwinds cost the company about $4 million in the second quarter after hedging, he said. Those headwinds are likely to get worse in the second half of the year as the dollar strengthens, said Kerry Rice, an analyst with Needham & Co. in San Francisco.

Analyst Ratings

Still, Rice is one of 11 out of 12 analysts covering Wix who recommend buying the stock. They expect it to gain 37 percent in the next 12 months, according to the average of estimates compiled by Bloomberg. JPMorgan’s Auty has a $42 price target, while Rice’s target is $30. Wix closed at $21.55 on August 7.

Shemesh, Wix’s CFO, is unfazed by the stock performance. He says profitability will improve in coming quarters because Wix is getting more “operating leverage,” meaning its revenue growth is picking up speed while expenses are roughly unchanged. He’s confident enough that he’s already working on a new Wix ad for next year’s Super Bowl.

“It was a great investment,” he said. “We’re certainly going to do another one.”

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