I can understand why people like ContextLogic (NASDAQ:WISH) stock. There are some compelling reasons why you’d want to root for this underdog.
Unfortunately, there aren’t enough of those reasons based in fact to make WISH stock a very compelling investment. So, as much as it would be fun to put your money behind ContextLogic and watch it cut deeply into Amazon’s (NASDAQ:AMZN) market share, what are the chances of that actually happening?
Are you willing to bet your hard-earned money on it?
I love a David vs. Goliath story as much as anyone. But in this case, WISH stock should definitely be avoided.
David vs. Goliath
You know the famous Biblical story. It resonates with us because the theme is so powerful. Undersized David faces the mammoth Philistine warrior Goliath – a mountain of a man who’s so intimidating that nobody would fight him.
David, of course, famously takes a smooth stone from a riverbed, puts it in his trusty slingshot, and fells the giant.
People love that kind of story – the little guy unexpectedly beating the huge titan. You see it all over popular culture, such as the Hoosiers movie starring Gene Hackman as the coach of a small high school basketball team in Indiana. Or there’s Erin Brockovich, the movie starring Julia Roberts in the title role as an environmental activist taking on Pacific Gas and Electric Co.
My favorite David vs. Goliath example is We Are Marshall, the movie based on the aftermath of a 1970 plane crash that killed the football team of Marshall University, my beloved alma mater.
In an investment portfolio, you’d have to think of ContextLogic vs. Amazon in the same vein as David vs. Goliath. Wouldn’t it be a great story if the little guy won this one?
Amazon Has Insurmountable Advantages
If any company can be considered a Goliath, it’s Amazon. In the second quarter, the company’s net income increased 50% year-over-year to $7.8 billion. Its revenues climbed 27% to $113.1 billion.
The conglomerate’s powerful Amazon Web Services – its cloud services unit – brought in $14.8 billion in revenue in Q2. ContextLogic doesn’t have a cloud business.
Amazon projected that its Q3 operating income would be between $2.5 billion and $6 billion.
WISH stock has light years to go before it can even sniff those kind of numbers.
WISH Stock at a Glance
To its credit, ContextLogic has the most downloaded shopping app in the world over the last three years, according to Sensor Tower.
And it has more than 100 million monthly active users, spread across over 100 countries.
That’s nothing to sneeze at.
As another InvestorPlace columnist, Muslim Farooque, noted, ContextLogic focuses on unbranded products that can be deeply discounted, compared to branded alternatives.
There’s some good and bad aspects of that approach. Sure, you can get some good bargains on the ContextLogic platform, but the quality may not be what you expect. In fact, the overall time spent on the platform fell by 15% in Q2, a sign that users weren’t finding the kind of goods they want.
ContextLogic says it will increase the quantity of branded goods on its website going forward. But that will also raise price points and won’t cater to bargain shoppers.
In the Q2, WISH stock recorded a loss of $111 million on $656 million in revenue. That equates to an earnings per share loss of 18 cents per share.
In the same quarter a year earlier, the company made $11 million on $701 million in revenue.
WISH stock only started trading publicly in December, but the shares have been a huge disappointment for investors. Opening at $24 when it debuted, ContextLogic is now trading for less than $6.
The Bottom Line
Amazon is the undisputed powerhouse in e-commerce. It’s single-handedly changed the way people shop. Amazon’s strength sapped the profits of shopping malls and department stores. It changed the retail game.
I don’t see ContextLogic making a dent in that shipping empire, even with a slingshot as deadly as the biblical David. In this battle, I’m putting my money – and my investment portfolio – squarely on Goliath.
On the date of publication, Patrick Sanders did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Patrick Sanders is a freelance writer and editor in Maryland, and from 2015 to 2019 was head of the investment advice section at U.S. News & World Report. Follow him on Twitter at @1patricksanders.