WIX 1.26.26
Analyst 1
Perhaps I can offer my opinion on the financial community's ability to assess management's return on cash. Basically, can these guys stick it to the market for wrongfully giving them a too-low multiple for too long? I’ll talk a little bit about the financial model so we’re on the same page with the numbers.
First, I'm going to note that Squarespace was taken private at a much higher cash multiple than Wix is currently trading. So, the private equity community, once upon a time, was very interested in this “subscription software-like business”. If Wix can demonstrate that it can hold on to its customers, protect them, and perhaps even sell more stuff by attaching more business solutions segment revenue or whatever, I’m still of the belief that there are enough private equity and public market investors out there who remember having looked at these things. They remember a story about a mission-critical tool for these smaller business customers who don't really have any other way to access these products and services, and that there'll be a positive cash flow annuity from that. As long as that churn rate's not too high, you can take the thing out at higher multiples than Wix is currently trading.
My view of it basically comes down to whether it’ll be disintermediated. Where’s the tech product space right now? How realistic is it to "vibe code" your way to not having to pay Wix's subscription and support fees? I’m less concerned with the financial community's ability to keep assigning an ever-lower multiple indefinitely if the product stays in place.
Analyst 2
I'm not pushing back, but I go back to the Brink's analogy. Brink's generates a lot of cash, literally and figuratively. You'd like to think there’s private equity for this, but there isn’t. I understand your plan with Squarespace, although it's backward-looking. I know there's Thoma Bravo and all these guys.
Analyst 1
Too much money. They do stupid deals.
Analyst 2
Right, but I don't like relying on that. I agree with it and understand it conceptually. It's like saying that works if you compare it to Squarespace. Even if you're out, you still need to rely on a deal. A lot can happen between now and then. You had Starboard in there, and it never happened, and the price went down. So that would be my pushback on that.
Yes, there's a lot of dumb money or excess capital out there, but just because there is doesn't mean this has to be the acquisition. Someone could go ahead and pay for something with less cash flow, or pay even more for it, because they think that the terminal multiple ties. The question also becomes, and I've seen from other businesses, even if you're right, let's say people look at this as it gets cheap, it could generate a lot of cash.
I think today, versus when Squarespace was acquired, the variance of outcomes is greater because of AI and vibecoding, and because they themselves bought Base44. The fact that they did is offensive, but it's also defensive. It can go a couple of ways, but it's definitely not purely offensive. It's demonstrating that they think there's risk.
I think the variance in outcomes is greater, and the terminal value could be lower. So if I'm a private equity firm buying this thing at "X" times cash flow, yeah, I can generate cash today. It very well could, and you could maybe ring it for even more cash. But the question is, what’s the terminal multiple on the other side? I know that, as a public marketplace, the market's not giving it credit, unless you can turn this into one of these AI plays and then re-IPO it in 16, 18, or 20 months.
Then you have to sell to someone else. Why would another private equity firm be willing to pay a higher multiple? Seemingly, the smart money has already looked at it. So, even though Squarespace did this, I'm not convinced you're necessarily a hot potato. If the name of this company is "Wixside AI" and they're a bot-coding company, they probably have a better situation. But you have the legacy tentacles and issues, and then the terminal risk. So I think anchoring to Squarespace is definitely a point, but I'm just not sure. There's hair.
Analyst 1
Another way I interpret what you just said is that it's on the merits of the products and their ability to service customers. Why would I keep my Wix subscription if I could just vibecode myself or find another competitor that has vibecoded it and is willing to sell it to me at a much lower price, low enough for me to go through the agony of changing my website vendor?
Analyst 2
There’s that, but there's also the second element. We wake up one day, and like Adobe with Figma, or Canva, people realize there’s something out there that’s superior to it. When the market realizes this is going to disrupt it, Wix’s valuation gets cut by a quarter or half just from a multiple. That's my concern, and it's the second bullet.
Analyst 1
Right. If that was viewed as a permanently impaired either corporate position or perhaps even the industry, all this AI stuff is going to be no margin for the vendors of it. Obviously very backward-looking, but I’d point out that total bookings growth remains in the low-to-mid teens. That's down a whole lot from when the company was younger, but the disruption hasn't yet materialized. It's the short summary from that. Meanwhile, it's a traditional software business where you make it once and sell it a hundred times, so it’s a positive free cash flow business.
I have it trading in high single digits and free cash flow to enterprise yield on 2025 numbers. Clearly, if you take that and apply significant growth to this "build at once, sell it a hundred times" relatively light capital-intensity business, it's pretty easy to get to magnificent free cash flow yields 3 or 4 years out. Well into the high teens or even mid-twenties, depending on what kind of growth rates you would assign. Clearly, if it doesn't grow but remains exactly where it is, an 8% unlevered free cash flow yield is a very tasty private equity target. It'll happen eventually if people are convinced that it won't shrink. Those are the numbers. I haven't heard you object to any of that, so I think we're probably on the same page about the financials.
Analyst 2
As you say, it's backward-looking. From 2022 to 2025, they hit their targets. They grew double digits. They've demonstrated maybe durability and resilience in spite of that. The multiple came in, which I think is also factual. My only point isn’t to say that I disagree. My point is, even if they hit their target, I agree it's attractive.
It sounds like you and I have been in the business for some time. You remember the TV broadcasters? "Great television this," and "they have these cash flows." Now they're levered, and these guys aren't, so fine. But cheap can get cheaper. The market can be this K-shape right now, and you see the really good stuff get bid up more.
Analyst 1
Yeah, we should surrender on what you said.
Analyst 2
I think you and I come from the same school of thought. Where I differ, and over time, it's just that I'm definitely not in the market, or even if I was, the market's more powerful than I am. So, therefore, I'm at the mercy of that. I have to ask how confidently I could underwrite the earnings.
I feel pretty confident the company will hit its targets because it's done so in the past, though the variance of outcomes is wider and there's more of a downside bias than before, given these risks. If they hit or beat their numbers, is the multiple going to be flat, up, or down? Historically, 20 and 10 years ago, earnings and the multiple went up. But I see that some of these businesses now have great balance sheets, cash, and seemingly good stories, yet they put them in the penalty box or at the bottom of the K. The multiple can't get out of the way. Maybe you need to buy that equity to do it, retool, or change it up.
That's the part where, even when I'm giving the market credit for all that, it's like that multiple part in the terminal. But if I'm wrong on the earnings and it doesn't hold up, because my bias is to be in the band or below, and that multiple's lower, I lose money. Not only that, but there's a 5%, 10%, or 20% chance we wake up one day with the Figma or whatever the "vibekiller," and then the market realizes this. Then my 20% prospective growth on the earnings or cash flow side, which I think is possible for this business, gets completely eroded, basically impairing my return on this, and perhaps worse. That's my concern, and it's just the math behind it.
Analyst 1
So, on the possibility of Wix being out-competed, I'm going to guess, please confirm or deny for me, that you don't see any of the current competitors having any sort of industry-rattling pricing or product moves imminent?
Analyst 2
I completely agree, which is why I started the conversation off by saying in the short-to-medium term, I feel good about this business and the earnings. It's just long-term, because of the ankle-biters or the known unknown. There could be a point in time when someone else swoops in as the OpenAI equivalent, comes in cheaper, or disrupts, even if they're not rational. I feel like the probability of that happening has increased just because it's easier to create things now than ever before. That's my only point.
Analyst 1
Well, this touches on some of the technical merits. Clearly, Sam is a spectacular pitchman, and if he were going to say that OpenAI was going to make websites, it would rattle the stock market. Do you have views on the technical capabilities? What would it take for somebody like that to do such a thing?
Analyst 2
I have a friend in the investment business who came up with the idea of building his own website, interface, or application. Part of his thesis was due to some tools and other things. So he started doing it and said that because of these tools, it's easier.
He showed me the whole backend and all the AB testing. He used Figma to have all the diagrams and the structures. So it wasn't so easy. I asked about AI and this. He said you couldn’t just do this because of X, Y, and Z, and he was scrambling. He told me someone else couldn’t just do this now, and that the more he's done this for months or the last year or so, the more technically capable the AI and some of this other stuff are becoming at doing things that would’ve been impossible in the past.
He’s now a one-man band. What he's able to do with a little help from overseas, but with AI, wouldn't have existed before. So I'm only doing this based on what I'm saying to you. I’ve also invested in many businesses over time, and I keep seeing these companies, some of which just use it as an excuse and some as cover, that’re saying they’re going to integrate AI or do this.
I think there's a middle ground between perception and reality. I think there's a reality that AI and technology are narrowing the gap. But I also think it won't change overnight. I think that Wix and the leadership team, who are smart and have demonstrated this, are better positioned than other vendors. But from a technical point of view, the capabilities you have today as a solopreneur or someone with a small organization, or with an AI, have narrowed the gap dramatically compared to before.
I’m not doing this for a computer engineer's purpose. I'm doing this secondhand. But to me, the fact that they acquired Base44, like vibecoding, suggests they either felt they were getting more value today or couldn't do it. They had to acquire it, at a minimum, defensively, and at a maximum, offensively.
But from a technical point of view, it’s much easier. I stand myself just as someone who built websites 20 years ago. The night-and-day difference is just that the friction is much lower.
I have friends who had a very successful startup and sold it for nine figures. This was years ago, before AI. I watched her build a professional website for a restaurant. She was at a restaurant with a group of friends, and told the owner the food was excellent, but they couldn't find the business online and didn’t know anything about it. She said the business should have a website. They said they weren’t technically savvy, so she asked the owner a couple of questions and asked for permission to do this. Literally, by the end of the meal, she had a professional website, with ordering and everything, done. I'm saying the technical capabilities here have narrowed dramatically. I'm not saying I couldn't do it or that I'm a little more savvy, but it's narrowed in a way that's very hard to understand unless you're there. Hopefully, that answered your question.
Analyst 1
Yes, I think so. I'll note that I built my firm's website, too, but I hired a vendor. In our case, we chose GoDaddy, which I think is more of a short than a long, given some of the product and strategic growth product positioning of the different management teams. I think GoDaddy is basically a runoff kind of posture, and Wix is more of a growth business posture. I think the stock market has made the differentiation because GoDaddy's just a terrible long-term investment, and Wix seems to have a more growth-oriented share base. The chart's picked up just a little just recently, anyway.
I view the narrower technical gap, the friction in doing this thing, as very real but not a catastrophic risk. I think the better place to be is a smaller client base, so 1 to 10 employees, rather than bigger than that. It appears to me, based on the data I've seen, largely from sell-side people, that that’s the case for Wix. It tends to run smaller and more consultant-led through the part where they work with outside third-party design and implementation firms.
Analyst 2
You're not being acquired or the prosumer.
Analyst 1
Yeah. So I think most of the customer set that Wix addresses and intends to continue to address is either not interested in literally doing it themselves or is dependent on third-party, who are going to be keenly interested in the technical merits of the product and the serviceability and breadth of the organization that's vending to them. So if I got this business and I design websites for medium-sized businesses in Oregon, and I'm like the go-to web person in Portland or one of the 12 people or so, it's going to be a big lift to get me to switch off many of my customers from Wix. That's partly because my consultant said so. It's basically a big pain for them to get off of GoDaddy, and I agreed that the pricing wasn’t that different and would do it. Or put differently, I think GoDaddy, if you agree with me that it's a runoff kind of posture, it's going to take a while for that to run off.
So I clearly have fewer concerns about the disruptability of this industry, given the value chain and how the end customer, particularly the ones I think Wix focuses on, make purchasing decisions, where Wix currently stands and is increasingly moving towards, with this additional billing, reservation-making, and other features, which do compete with other vendors. But I like where Wix is coming from as sort of the ultimate source. All that stuff runs through a website anyway. So I'd basically rather be Wix than Mindbody.
That's kind of where I hear it. I really appreciate you outlining that this is a concern, because, admittedly, it's kind of difficult to put hard numbers on all this. I agree that the range of outcomes has widened because of developments in AI tooling, which may lead to someone coming up with a super-duper game-changer. It's certainly all the AI people are touting in other fields. Could that be the case in website design and management for small businesses? Seems to me that should be up, but I'm not sure I agree with you about the magnitude of that increased uncertainty.
Analyst 2
Well, I invest in businesses where people were sure there'd be zeros, and they're still around. They have long tails. Cash is one example, and other things like that. I'm saying that you or I are actually applying the same page. That's even if a clinical gets disrupted, because cash, people say there's digital memes, and there's other memes, fine.
I'm only saying that I've seen this before with stocks, and talking purely about the stock elements of it, where we could be smarter, you and I as contrarians, but the market is only willing to pay a lower multiple, so we don't make money on that. What I'm saying is, I just have evidence from other things I've invested in, maybe I've invested in the wrong things, where the market keeps penalizing someone even with growth. The narrative is they grow 10%, 15%, 20%, but it accelerates; they still can't stabilize or get a higher multiple. Then, inevitably, at some point, do they have a bad quarter? Over time, people say they were told so, and the multiples get lower.