2 Reasons to Sell WIX and 1 Stock to Buy Instead

Yahoo

a day ago

Wix's stock price has taken a beating over the past six months, shedding 26% of its value and falling to $164.79 per share. This may have investors wondering how to approach the situation.
Is there a buying opportunity in Wix, or does it present a risk to your portfolio? Dive into our full research report to see our analyst team's opinion, it's free.
Even though the stock has become cheaper, we're sitting this one out for now. Here are two reasons why you should be careful with WIX and a stock we'd rather own.
Examining a company's long-term performance can provide clues about its quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. Over the last three years, Wix grew its sales at a 11.5% annual rate. Although this growth is acceptable on an absolute basis, it fell short of our standards for the software sector, which enjoys a number of secular tailwinds.
For software companies like Wix, gross profit tells us how much money remains after paying for the base cost of products and services (typically servers, licenses, and certain personnel). These costs are usually low as a percentage of revenue, explaining why software is more lucrative than other sectors.
Wix's gross margin is slightly below the average software company, giving it less room than its competitors to invest in areas such as product and sales. As you can see below, it averaged a 68.1% gross margin over the last year. Said differently, Wix had to pay a chunky $31.92 to its service providers for every $100 in revenue.
Wix isn't a terrible business, but it isn't one of our picks. Following the recent decline, the stock trades at 4.9× forward price-to-sales (or $164.79 per share). While this valuation is fair, the upside isn't great compared to the potential downside. We're pretty confident there are superior stocks to buy right now. We'd suggest looking at a fast-growing restaurant franchise with an A+ ranch dressing sauce.
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