A week after a disappointing earnings report sent shares of ContextLogic (NASDAQ:WISH) plunging almost 21%, WISH stock hovers just above its 12-month low of $6.14 a share.
At one point on Aug. 13, shares were down 28.9% from the previous day’s close. The hits kept coming, as one influential analyst said the company’s outlook implied “significant damage” to its business model.
Honestly, it wasn’t a good quarter. The company reported a year-over-year decline in sales and earnings, which both missed analysts’ expectations. A top- and bottom-line miss is bad enough, but combined with declines to both metrics only adds salt to the wound.
Despite this horrendous reaction and with shares hitting new all-time lows, there actually is a potential long setup according to the charts. Keep in mind, I say that as a non-bull in this stock — so it’s not a bias issue that has me keying in on WISH stock.
Let’s look at the chart first.
Trading WISH Stock
As we look at the chart (right), there is one key level that stands out: $7.60.
After opening at $6.96, the stock quickly shot back up to this area. This level, which was the prior low from May and June, becomes pivotal. Either WISH stock can reclaim this level or it can’t.
If it can’t, prior support becomes current resistance, leaving ContextLogic vulnerable to more selling pressure. In particular, it leaves the stock’s post-earnings low (at $6.69) in play.
However, if WISH stock can reclaim the $7.60 level, it gives bulls a reasonable risk/reward long setup. Well, that’s assuming they’re comfortable buying the dip on a former meme stock making new lows and can swallow a 12% stop-loss on the setup.
How’s that?
If shares can reclaim $7.60, traders can use a stop-loss at or just below the current low, which is about 12% below the $7.60 mark.
Above $7.60 and it’s possible that WISH stock can rally back toward its 10-day and 21-day moving averages. Further, it can potentially fill its earnings gap back toward $9.34.
Not that I consider these two companies equals, but this would be very similar action to what we saw with Fastly (NYSE:FSLY) earlier this month.
Again, there is no guarantee that WISH stock finds its footing and goes flying higher. It may very well struggle with the $7.60 to $8 area and roll back over. Further, it remains a speculative trading vehicle with wide ranges and plenty of volatility.
I would not consider it a high-quality investment at this time.
Breaking Down ContextLogic
When we take a fundamental look at ContextLogic, we have to start with the most recent quarter. You know, the one that triggered a 20% landslide.
The company lost $111 million in the quarter vs. $11 million in the same quarter a year ago. That translated to a loss of 18 cents a share, while analysts were only expecting a loss of 13 cents per share.
On the sales side, revenue of $656 million fell 6.4% from $701 million a year ago and missed consensus estimates of roughly $723 million.
In other words, analysts were looking for year-over-year growth. Not only did the company fail to meet consensus estimates (which called for about 3% growth), but business went in reverse.
The once-bullish JPMorgan (NYSE:JPM) analyst Doug Anmuth — of “significant damage” concern — knocked the stock down two notches to underweight. That was after more than seven months at overweight.
Those are just the headline numbers and to be honest, the press release is a bit bare. When you dig deeper for some of the details, it doesn’t get much better. From the conference call:
Once we saw this reduction in retention and increase in cost of acquiring new customers, we adjusted our user acquisition strategy. So as a result of these factors, Q2 MAUs were down 22% year-over-year and active buyers were actually down 44%, year-over-year.
This trend actually continued into July as MAUs are down 9%, even compared to June. So, we do plan to reinvest in growth once we see improvements in user engagement trends. But until then, we think that spending on low retention buyers is not a good strategy for us.
After previously making some changes, management expected user retention to increase. Instead, “our retention declined.” Now the company wants to make more changes — as they should!
However, “we expect it will be several quarters before the benefits begin to materialize.”
So we’re seeing the company drastically underperform not only analysts’ expectations but management’s too. And now they’re telling us that it will take “several” quarters to kick in — assuming those changes actually work.
The Bottom Line
Clearly the company is not doing well and to be honest, I’m surprised the stock recovered the way it did on Friday. That said, at what price is enough, enough? The company’s market capitalization has plunged below $5 billion, as it nears a 1.5-times revenue multiple.
Maybe it’s destined to trade below $5 and obviously it’s not a high-quality blue-chip stock. If the fundamentals keep you away, that’s fine. Just know that the technicals offer a shred of hope, albeit, not much.
On the date of publication, Bret Kenwell held a long position in FSLY. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell.