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JPMorgan defends Wix amid rout as CFO plots next super bowl ad

JPMorgan analysts argued that Wix's Super Bowl ad added more new subscribers than anticipated, and became profitable on an adjusted basis for the first time, something the company had said wouldn't happen until the second half of 2015.

[NEW YORK]'s decision to splurge on a Super Bowl ad earlier this year resulted in the Israeli Internet company attracting a record number of new users last quarter. Investors responded by dumping its shares.

Wix, which provides free online tools to build websites, added a record FIVE million new users, while the number of paying subscribers rose almost 50 per cent from a year ago to 1.5 million. Even so, it only met second-quarter sales guidance, and didn't raise the forecast for the rest of the year. That was enough to spark a 23 per cent rout in the stock last week, wiping out US$248 million of market value.

With Internet stock valuations near the highest in at least 10 years, traders are punishing technology companies that show anything less than robust growth. That's making it hard for Wix, a startup that went public less than two years ago and has yet to turn a profit, to catch a break from investors, according to Bruce Schoenfeld, research director at New York-based BlueStar Global Investors.

"If growth is not accelerating as fast as people want it, or God forbid slowing, then investors will sell first and then re-look," said Schoenfeld, whose company designs indexes to invest in Israeli companies. "The earnings were actually pretty good." Wix's revenue rose 43 per cent to US$48.6 million in the second quarter. It had a net loss of US$12.3 million, compared with the US$12.9 million average estimate of eight analysts.

The Tel Aviv-based company used National Football League legends such as former quarterback Brett Favre in a 30-second Super Bowl commercial last year. The ad cost Wix somewhere between US$4 million and $6 million, JPMorgan Chase & Co estimated at the time, about 10 per cent of revenue in the fourth-quarter of 2014. Wix was the worst performer on the Bloomberg Israel-US Equity Index in the five days through Aug 7 after Caesarstone Sdot-Yam Ltd., the maker of quartz counter tops that reduced its 2015 revenue forecast last week, spurring a 25 per cent decline. The index dropped 1.8 per cent.

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JPMorgan analysts, who defended Wix's Super Bowl ad spending in February, again came out in favor of the company, arguing that it added more new subscribers than anticipated, and became profitable on an adjusted basis for the first time, something the company had said wouldn't happen until the second half of 2015.

"We believe this is the wrong interpretation as we see the business momentum being very strong," JPMorgan analysts led by Sterling Auty wrote in an Aug 5 note.

Wix expects revenue to reach as much as US$203 million this year, a 43 per cent increase from 2014. Adjusted earnings before income, taxes, depreciation and amortization will be as much as US$12 million in 2015, compared with an earlier forecast of as much as US$9 million, the company said last week.

Wix, which gets about half its revenue from outside North America, would have had higher adjusted earnings if not for currency depreciation in places like Russia and Brazil, chief financial officer Lior Shemesh said in a telephone interview. Currency headwinds cost the company about US$4 million in the second quarter after hedging, he said. Those headwinds are likely to get worse in the second half of the year as the dollar strengthens, said Kerry Rice, an analyst with Needham & Co in San Francisco.

Still, Mr Rice is one of 11 out of 12 analysts covering Wix who recommend buying the stock. They expect it to gain 37 per cent in the next 12 months, according to the average of estimates compiled by Bloomberg. JPMorgan's Mr Auty has a US$42 price target, while Mr Rice's target is US$30. Wix closed at US$21.55 on August 7.

Mr Shemesh, Wix's CFO, is unfazed by the stock performance. He says profitability will improve in coming quarters because Wix is getting more "operating leverage," meaning its revenue growth is picking up speed while expenses are roughly unchanged. He's confident enough that he's already working on a new Wix ad for next year's Super Bowl.

"It was a great investment," he said. "We're certainly going to do another one."


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