#016 - Wix

Wix allows people to create a website for a personal project, small business, or a large company. Wix continues to build tools to help people build a website and run a business.

Wix - (NASDAQ: WIX)

Wix allows people to create a website for a personal project, small business, or a large company. Wix continues to build tools to help people build a website and run a business.

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Please note that this article does not constitute investment advice in any form. This article is not a research report and is not intended to serve as the basis for any investment decision. All investments involve risk and the past performance of a security or financial product does not guarantee future returns. Investors have to conduct their own research before conducting any transaction. There is always the risk of losing parts or all of your money when you invest in securities or other financial products.


Over the next couple of weeks, I’ll be working through companies in the e-commerce/web infrastructure space (BIGC, GDDY, and other companies). I’ve decided to work through industries before moving on. I’d rather learn about an industry and the major competitors before moving on. Jumping from one company to an unrelated company doesn’t seem beneficial and just leads to weak research. I know this change will help me better understand industries and pick out winners and losers.

If you have any suggestions for companies to add to my watchlist or industries to cover in the future (semis, internet, or whatever) email me at stratusyoung@gmail.com.

Industry Overview

There are many companies that help you setup a blog, website, online store, or just a digital presence. To some extent, Wix competes with other companies like Twitter and Instagram because if I’m an entrepreneur, do I really need a website? Why not just have a personal Twitter account or if I’m an influencer, why not just use Instagram instead of a website? If I’m a photographer I’d probably just use Instagram rather than creating a website with my portfolio.

But if I’m a small business owner or simply a business, I need to have a website. It’s the bare minimum. If I’m selling physical products, I’m likely to choose Shopify or a couple other companies (Wix is in that bucket of companies). Wix’s bread and butter isn’t e-commerce, it’s moreso serving the rest of the internet ranging from small 1 man websites to large enterprises.

Wix wins when a business doesn’t need to sell products or does more than just selling products. For example, if I’m a gym owner and I sell fitness classes, gym memberships, and branded apparel, I might use Wix because I only need the commerce function for a small portion of my total revenue. Wix has different products that make scheduling a fitness class or collecting memberships easy and simple. Of course, Shopify also enables some of these features but Avishai Abrahami (Co-Founder and CEO of Wix) had the following quote:

“If you're a big agency, probably 5% of your projects are e-commerce projects. 95% of them are not. So you can either use Shopify for that. You cannot use Magento for that, right, because they just don't do none-commerce. They all do e-commerce. So we go after the 95%.”

So even though e-commerce might be front of mind, there are many other projects and use cases than just building an online store. One of the key questions though is that e-commerce is more transactional and hence monetizable so what does that mean for Wix?

Business Overview

Wix has a handful of important product lines that are essential to understanding its business. Creative Solutions encompasses the subscription fees that users pay for tools to create and manage a website. This could be used by anyone ranging from a one-person blog to a large enterprise like Lyft. This is the main business line and accounted for 79.2% of revenue in 2020. This has decreased over time as Business Solutions revenue has increased. Wix also relies on selling domain registrations for a small portion of its revenue.

Business Solutions revenue is made up of four primary business activities, Ascend, G-Suite, Facebook Ads, and most recently Wix Payments. Ascend is Wix’s marketing and CRM application for users. Wix also collects revenue by reselling Google’s G-Suite product. Wix helps users create and manage Facebook ad campaigns all from the user’s dashboard. Lastly, Wix Payments was launched in 2019 and has grown to more than $50 million in revenue in 2020. There are a number of other new products/initiatives that are included in Business Solutions revenue such as Wix’s Point of Sale system, Wix Answers, Wix Logo Maker, and DeviantArt.

In a nutshell Wix helps people manage websites and offers other tools to help make this process easier or add additional functionality through apps or other products and services. Wix works with both inexperienced users like me who have no idea how to design a website to agencies whose profession is to build websites for others. Wix caters to all types of users and offers various products depending on your level of expertise.

Total Addressable Market

Wix’s total addressable market is basically the sum of people, businesses, or events that need a website + any additional products or services this customer base needs to have a functioning website. A person might have a website for their background, resume, experiences, portfolio, or whatever else.

A business needs a website. Different businesses need different products from Wix, but going forward every business needs a website. Wix offers many additional products that business owners can use to help manage their website.

Here is a list of some of the features Wix offers:

  • Complete e-commerce platform

  • Online bookings platform (appointments, courses, classes)

  • Ticket and event management

  • Take online orders (restaurants)

  • Manage hotel reservations

  • Monetize art & content

This is just a handful of the features that Wix offers. Wix will likely to continue to build solutions for more industry verticals.

Competitive Advantages

  • Partner Ecosystem / Marketplace

    Wix has two primary tools that creates an ecosystem/marketplace. The Wix App Market is the first place. Just like Shopify has a partner ecosystem, Wix has an app market to help users find tools to make it easier to manage a website. The second is Wix Marketplace where users can connect with a designer, marketer, web developer or others to help you create and manage your site.

    Why does this give Wix a sustainable competitive advantage? Well, Wix’s future and current customer base will be attracted to use Wix over other competitors because of the access to apps and services. Building out all the capabilities you need for your site would be prohibitive. Instead, users take advantage of the App Market or Wix Marketplace to reduce the friction of building a website and focus on more important factors. Of course, if you make apps or you’re a designer, marketer, or developer, you want to be on the platform that has the most amount of users and potential customers. This is a mini-network effect (I hate to say network effect, but it essentially is.) I believe this is also Shopify’s main competitive advantage.

  • Switching Costs / Learning Curve

    If you’re using Wix for a personal site or even if you’re a small business owner, the headache of designing a website and the amount of time spent learning how to use the tools to design a website stops you from switching to a competitors website even if it offers you a small discount on the subscription price.

    Paying $27/month for the Business Unlimited Plan (the most popular plan according to Wix) isn’t a major cost that business owners are likely to be concerned about. Saving $5/month by changing from Wix to Shopify, Webflow, or any other competitor is not worth the headache of having to start completely over on your website.

  • Scale

    Wix can build products for its users that smaller competitors can’t. Competitors may not be able to focus on a specific customer base like restaurants and solve all of their needs since the costs of developing the products might outweigh the number of restaurants that might actually use the product. Wix has a large base of customers in many different verticals and can offer solutions to problems across many industries through its own product development or the App Market. Smaller competitors likely can’t do this.

Financials

A couple of notes from my research.

“Applications revenue is also generated by applications sold through our App Market by third party developers for which we receive a portion of the sales price paid by our registered users. For applications developed by third-party application developers, other than Google, we account for revenues on a net basis by recognizing only the commission we retain from each sale.”

It seems Wix relies heavily on Google for Business Solutions revenue.

“The significant majority of Business Solutions revenue in 2019 was generated through the sale of applications. G-Suite, which we re-sell on behalf of Google and which allows our users to create a personalized Gmail email address using their domain name, comprised the majority of application sales in 2019.”

This risk will likely be mitigated once Wix Payments becomes a larger portion of Business Solutions revenue.

2020

  • Creative solutions revenue = ~ $783 million

  • Business solutions revenue = ~ $205 million

  • Gross profit = ~ $673 million

  • GAAP EBIT = ~ -$197 million

  • Free cash flow = ~ $129 million

  • Registered users = ~ 197 million

  • Premium subscribers = ~ 5.5 million

  • Average creative solutions revenue per premium subscriber = $142.60

  • Creative solutions revenue growth = ~21.6%

  • Business solutions revenue growth = ~76.1%

  • Creative solutions gross profit margin = ~ 78.6%

  • Business solutions gross profit margin = ~ 27.8%

  • GAAP EBIT margin = ~ -20.0%

  • Free cash flow margin = ~ 13.1%

2019

  • Creative solutions revenue = ~ $644 million

  • Business solutions revenue = ~ $117 million

  • Gross profit = ~ $564 million

  • GAAP EBIT = ~ -$80 million

  • Free cash flow = ~ $127 million

  • Registered users = ~ 165 million

  • Premium subscribers = ~ 4.5 million

  • Average creative solutions revenue per premium subscriber = $143.25

  • Creative solutions revenue growth = ~22.7%

  • Business solutions revenue growth = ~48.8%

  • Creative solutions gross profit margin = ~ 81.2%

  • Business solutions gross profit margin = ~ 34.8%

  • GAAP EBIT margin = ~ -10.5%

  • Free cash flow margin = ~ 16.8%

2018

  • Creative solutions revenue = ~ $525 million

  • Business solutions revenue = ~ $78 million

  • Gross profit = ~ $477 million

  • GAAP EBIT = ~ -$31 million

  • Free cash flow = ~ $102 million

  • Registered users = ~ 142 million

  • Premium subscribers = ~ 4.0 million

  • Average creative solutions revenue per premium subscriber = $131.88

  • Creative solutions revenue growth = ~34.2%

  • Business solutions revenue growth = ~128.5%

  • Creative solutions gross profit margin = ~ 83.9%

  • Business solutions gross profit margin = ~ 46.1%

  • GAAP EBIT margin = ~ -5.1%

  • Free cash flow margin = ~ 16.8%

Business solutions revenue accelerated mainly from Wix Payments. Management is optimistic about payments and what it might do to the business in a couple of years. Payments is also the reason the gross profit margin for Business Solutions is decreasing, but management says this will likely increase in the long-term.

“Wix Payments collections and revenue was $53.6 million in 2020, a 382% increase over $11.1 million in 2019 as we improved our take rate throughout the year. We expect GPV will be $10 billion in 2021.”

What’s Interesting

  • “…50% of anything new built on the internet will be done on Wix.”

    This is the initial statement from the shareholder update that initially caught my attention. The full statement is below:

    “My goal and belief is that at this rate of growth, in the next 5-7 years, 50% of anything new built on the internet will be done on Wix.”

    Obviously with COVID-19 there has been an extreme acceleration and adoption of different technology such as e-commerce. Even Wix has benefitted because more restaurants, hotels, and other industries have used Wix to create an online presence. I just wonder what Wix could look like in a number of years. I think Shopify has captured the e-commerce side of things but there’s still so much potential for what the internet can be and look like in a number of years.

    I don’t think people will stop creating and using websites anytime soon and I think Wix continues to add new products and rollout new features to help more and more businesses.

  • Founder Led

    I love founder-led companies. Avishai Abrahami is Wix’s CEO and is also a co-founder alongside Giora Kaplan and Nadav Abrahami. These co-founders likely treat Wix like their baby and are invested for the long-term.

Future Questions

  • Future Monetization?

    Since Wix’s bread and butter isn’t e-commerce and Shopify has won that market, is Wix able to continue to monetize it’s product offerings? Since e-commerce is transactional, Shopify is able to capture the value it creates, but is Wix able to capture the value on it’s products and tools? At some point will Wix just monetize too much and put a burden on its clients and users?

    For example, if I’m a photographer and I want to showcase my pictures, I only pay Wix a subscription fee and I’m not guaranteed to have success. Wix doesn’t help me find clients or work. If I’m an entrepreneur selling products on Shopify, Shopify collects a subscription and a small portion of the GMV sold through my store. Shopify benefits when I benefit. This is why comparing Wix to Shopify might be an apples to oranges comparison.

  • Wix Payments?

    Wix Payments also caught my eye when researching Wix. My main question is just how large can the payments piece of the business be in a best case scenario. It’s had tremendous growth from 2019 to 2020 and management believes there is a large runway of growth. Payments can change the trajectory and story of Wix.

    It seems like every business loves to add payments eventually. I’ll do research on this one day, but it must be smart to pursue adding this offering if you’re an Amazon, Shopify, etc.

Conclusion

Wix looks like a super interesting business. For the longest time I’ve been a Shopify bull and just dismissed most companies that were competitors but I think Wix competes in an interesting way and could be just as successful. I’ll be covering more companies in the web infrastructure/e-commerce software space over the next couple of weeks. If you have any companies you want to suggest, please email me at stratusyoung@gmail.com.


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