Wix – Leading Web Development & E-Commerce SaaS Business Challenging Shopify

Wix – The Story of This Company

This company is a SaaS company in the website development space.

It provides solutions to customers to develop nice-looking websites easily, on a DIY (do-it-yourself) & drag and drop WYSIWYG (what-you-see-is-what-you-get) basis.

Basically it makes website development & maintenance very simple, easy and fast for everyone, at a low price (free to ~USD 50 per month).

It targets mainly individuals, entrepreneurs, and small & medium businesses.

At the same time, it also increasingly targets the professionals, providing complex features & solutions for those who want them.

The website development market can be broadly broken down into the DIY market & the professional market.

The DIY space is highly fragmented, with many players and low barrier of entry.

The professional space is mainly served by old solutions & time-consuming coding, with the more advanced content management system (CMS) being WordPress, Drupal & Joomla.

This company operates in both the spaces, with large combined TAM of USD 300+ billion as of 2018 (with USD 30+ billion for DIY).

This company also offers other business solutions (e.g. payments, sale of business applications like marketing, vertical ERP & CRM), which brings the TAM further up to USD 400+ billion.

With the company’s revenue at ~USD 1 billion in 2020, i.e. <0.3% of TAM, the company has a long runway to go.

The runway is supported by industry tailwind, with people increasingly moving online & digitalising their businesses, accelerated by Covid-19 in 2020.

The shift from offline commerce to e-commerce provides another tailwind, as this company increasingly operates in that space too, competing with Shopify & the likes.

To the chairman of this company (who invested in it since its early pre-IPO days), it is just about 3 things.

Two of them relate to being a product machine & a marketing machine, so let’s briefly explore them.

On this company being a product machine, this company constantly releases new products over time, spending lots on R&D (USD 320 million in 2020).

Developing nice-looking features that are easy for users to use seems easy. But it actually is not, back-end wise.

Many big boys have not succeeded in this game in the past, including Microsoft Frontpage, Intuit Homestead, Adobe Muse/ Project Rome/ Catalyst, & Apple iWeb.

This company’s lead in product innovation & usefulness is proven by its increasing market share over the years.

In 2015, it was one of the smallest players with 0.1% market share (62% of market did not use any CMS then).

In 2020, it has become the largest DIY player with 1.5% market share.

While the others grew much slower (or even declined) during the same period.

E.g. Squarespace from 0.2% to 1.4%, Blogger from 1.1% to 1.0%, Weebly from 0.1% to 0.3%, GoDaddy from 0.1% to 0.2%, & Webflow at 0.2% in 2020.

Its product innovations have also led to the development of two game changing products – Velo (formerly known as Corvid by Wix or Wix Code) & Editor X.

These products allow users to build complex features on their websites easily & quickly, sometimes codeless.

These make it very easy to design & maintain the websites – think about the designers who don’t know how to code but can now design as they want without the need to code.

With these two products fully launched in 2020/2021, this company is now well placed to go upmarket & tackle the professional market, competing with WordPress which is still the popular option.

The introduction & improvement of e-commerce solutions in 2020 also helps this company to tackle the e-commerce market, competing with Shopify etc.

These new target markets – professional users and e-commerce users – have higher lifetime value & retention rates, thereby increasing the intrinsic value of the company.

On this company being a marketing machine, the chief marketing officer is only given one KPI (key performance indicator).

That’s TROI – time to return on (marketing) investment – where the company wants to invest as much as possible on marketing, as long as the TROI is within 3 quarters.

This is because the company has amazing user cohort economics, with negative dollar churn.

When this company spends say $100 to acquire a new user cohort, it would be able to collect more than $100 back from the paid users of this cohort in the first year.

In subsequent years, some free users would convert to paid users, replacing some paid users that drop off.

This, coupled with some users upgrading to higher value plans that cost more, results in the company being able to collect at least $100 again in every year, up to at least 10 years.

Therefore, this company, if it wants, can choose to stop spending & acquiring new user cohorts, and still be able to collect lots of collections from existing users in the future.

At end 2020, this company estimates that, just from existing users, it can collect USD 13 billion of collections over the next 10 years.

These powerful business model & unit economics have helped the company to grow rapidly in the past decade.

From 2010 to 2020, free users grew from 6.5 million to 197 million, a CAGR of 41%. Paid users grew from 0.1 million to 5.5 million, a CAGR of 43%

Revenue grew hundredfold, from USD 10 million to USD 1 billion, a CAGR of 59% (or a lower CAGR of 37% in the past 5 years, from 2015 to 2020).

While having a gross profit margin of 68% in 2020 (with core subscription business having a GPM of ~80%), & strong cash flows generation due to its negative working capital (collecting annual or multi-year subscription fees upfront from users).

To protect its turf & high capital returns in this capitalistic world, the company has also been building up various competitive advantages or moats.

For example, switching costs, branding, cost advantage & network effect (on data collection & its marketplace for applications and partners), which we discuss in detail in our Multibagger Research Series.

And the good thing is this company comes with a group of capable & enthusiastic management team.

The management team is closely bonded, treats the company as a family, and has mainly been with company for long, since its early years of founding (in 2006).

And they have shares in the company that are worth much more than their annual compensation package, which is also highly variable (70%-80%), with only a small component of fixed salary.

For a company in an industry with long runway & good reinvestment opportunities at high ROIC, what we investors want is a management team that is willing to invest for the long term.

And that’s what this management team is, constantly ploughing back cash flows to R&D and S&M investments, to grow & expand, although this leads to the company being (increasingly) loss making on GAAP accounting terms.

But that’s the right thing to do, and that’s what’s best for the company and long term shareholders.

All these points above lead to a high chance of compounding the company’s value, and value for its shareholders, for many years to come.

If you are interested in knowing more about this company, do watch our summary analysis video below!

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