Wix.com: A Hidden AI Winner Trading At 10x Free Cash Flow? (Ticker: WIX)

Don't throw the baby out with the AI bath water.

Today, Emerging Moats subscribers are receiving a report on Wix.com (Ticker: WIX). Next week, I will be covering Philip Morris International’s latest earnings.

Here is the upcoming schedule for the rest of Q1:

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Let’s rewind the clock. Five years ago. February 2021.

GameStop was going up 100% a day. Shopify was trading at 60x sales. You couldn’t buy a pandemic beneficiary at too high a price. I remember Fastly getting pitched as a $250 billion business? It marked the official top for the unprofitable stay-at-home stocks and my unofficial top in the bull market animal spirits, determined by how many non-investing friends were pinging me about stocks.

At the same time, two naive young investors (Ryan and myself) started an investment fund for family and friends. Our idea was to start small, invest with a concentrated, buy-and-hold approach, and keep costs to a minimum while building a marketable track record. Five years on, we could then use this audited track record to grow to a more professional level of AUM.

Turns out it was a bad time to launch a fund without any bear market experience. At launch in February 2021, we had plenty of optimism about our long-term approach and buying quality at a reasonable price. Eventually, the best businesses win out, right? Turns out, a reasonable price is not 20x sales. And while our performance ended up being adequate through closing the fund at the end of 2023 (we did begin with some great value names like Sprouts Farmers Market and Altria Group that have outperformed since February 2021), we had dug ourselves too deep a hole to make our performance marketable without many more years of operating at a loss, given our subscale and fee structure.

Wix.com (Ticker: WIX) was one “quality stock” that killed our performance in 2021. And 2022. I actually remember distinctly buying at over $300, averaging down 8 times, using it for tax-loss harvesting, and then getting back in below $60 in June of 2022. I know, depraved stuff. From there, the stock price recovered, and I think we actually made out okay.

But it could have been much better if we just simply waited for the stock to trade at an attractive valuation.

Why am I telling you this story? Because five years on, we may not just be getting Wix at a good price, but a great one. Wix is now considered an “AI loser” because, apparently, your local restaurant is going to save $500 a year after vibe coding their own website with Claude. I’m a tad skeptical.

The website creation and small business management platform has accelerated topline growth following the 2022 pandemic bullwhip, is now consistently generating free cash flow and repurchasing stock, and trades at 3x gross profit compared to 20x sales in 2021. Oh, and it just acquired one of the fastest-growing vibe coding platforms.

The more Wix’s stock price falls, the more interested I get. As I write this on Thursday, February 5th, the share price looks headed to $75 and a P/GP of 3. It is the definition of a falling knife, sure, but that is irrelevant to someone with a three to five-year time horizon such as myself.

I am a firm believer that AI will be disruptive to the software market, making it more competitive. But I am also a firm believer that AI is not going to kill software. Grandma’s bakery is not going to spend hours and hours of work trying to replicate QuickBooks. Or her Wix website that her daughter made for her.

Given the timeliness of the drawdown before Wix reports earnings in February, I have bumped up this research report for Emerging Moats subscribers.

Report summary:

• Core business threat

• Transformative potential of Base44

• Modeling legacy cash flow

• Has management turned a corner?

• Is there an emerging moat?

• Valuation

• My investment decision

Let’s begin with what Wix does, and how it is supposedly under threat today.

The core business threat