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Early in the second quarter, we used the market selloff to double the position size of our long-standing investment in (WIX). We have long thought that investors were too pessimistic in their view of WIX as a simple website hosting firm, when in reality WIX is an infrastructure layer upon which extremely sticky customers utilize a self-service operating system to manage and grow their businesses. At our purchase price, we believe that investors failed to appreciate WIX’s position at the beginning of a new stage of growth. The first stage of growth was achieved by expanding a website building platform with a steady funnel of users converting to subscribers. The second stage of growth is fed by expanding the operating system for business owners to manage their businesses on. With any business we invest in, we look for multiple ways to win. With WIX, there are five.

First, WIX has put in place a highly scalable system for low cost customer acquisition. WIX’s superior brand recognition supports a freemium business model which adds more than two million new users per month to a growing base of 172 million registered users. Registered users are then converted into paying subscribers when they connect their free website to a domain name. The customer acquisition funnel provided by the 172 million registered users contributes over half of new monthly subscribers that add to a growing base of 4.7 million monthly subscribers. The negligible marginal cost of adding these registered users then contributes to a high ratio of customer lifetime value to customer acquisition costs, and a long runway of growing margins.

Second, WIX’s runway for scalable global growth has been accelerated by COVID-19. Companies around the world need an online presence to effectively market and manage their businesses. This long-term secular tailwind has been strengthened as social distancing has accelerated e-commerce penetration gains and has increased the need for businesses to have an online presence. While WIX has seen an initial uptick of this strengthening tailwind in April with new user registration increasing 63% and net premium subscriptions growing 207%, the trend of businesses moving online has a very long tail. In the United States, 36% of small and medium sized businesses do not have a web presence. In the rest of the world, this number is far greater. WIX’s customer base is split between North America (56%), Europe (25%),LatAm (6%), and Asia (13%). As the need for an online presence grows across developed and developing economies, WIX’s brand recognition, superior product offering, and industry leading scale ensures that they capture an outsized share of this growth.

Third, WIX is growing the moat around its business. Industry leading scale in a highly fragmented market feeds scale benefits in product development that is then shared with the customer base. The advantage of shared scale benefits mean that with a customer base over twice as large as their next largest competitor, WIX is able to deploy over 1600 research and development professionals when their closed customer feedback loop identifies attractive niches to allocate resources to. This ability to develop new products and improve existing products to expeditiously meet needs of users ensures that WIX is always at the forefront of product innovation. The continued expansion in the number of vertical applications in the WIX ecosystem are then offered to WIX’s 4.7 million premium subscribers. Applications include everything from Wix Ascend for client communication to Wix eCommerce. The recently launched Wix eCommerce provides an end to end platform for subscribers to use advanced marketing tools to target shoppers, sell products and services through multiple sales channels, accept online payments, and manage end to end fulfillment. As the number of applications grows, the value of the ecosystem as an operating system to manage a business grows. Growing switching costs then support growing net revenue retention, and margin expansion over the long term.

Fourth, WIX is expanding into areas with greater total addressable markets. With the recent launch of WIX’s web design and content creation platform EditorX, WIX provides developer facing APIs for professional agencies. Professional agencies serve the Do It For Me website market, a market that is ten times the size of WIX’s historical Do It Yourself market. Every agency that WIX adds to the EditorX platform procures a growing stream of subscribers to WIX’s platform. These subscribers are higher value clients than those in the Do It Yourself market as their professionally developed websites consume more of the functionality that WIX offers, which generates higher average revenue per subscriber.

Fifth, WIX is adding to its application layer upon which independent developers can build vertical applications on top of WIX infrastructure. WIX’s Corvid product allows for custom coding upon which developers build purpose-built applications for company use. As more subscribers, agencies, and independent developers build functionalities on top of Corvid, a virtuous cycle of data generation, insight, and more developer facing APIs, drives a flywheel of higher cash flow, reinvestments, and further shared scale economics.

In WIX, we get a highly scalable growing ecosystem with the industry scale, balance sheet, and internally generated free cash flow to fund a long runway of high incremental returns on invested capital investment opportunities. All of this is backed by the secular tailwinds of a growing need for businesses to have an e-commerce presence, which has been accelerated by the new normal of social distancing. All told, we believe that there is a low bar for WIX to grow sales over 400% in the near term at minimal incremental cost as the scalability of the platform becomes visible.

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