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A website is table stakes for any kind of marketable activity in this day and age. Creative professionals and hobbyists need one to show off their work to potential patrons or employers. Small businesses need one to showcase their products and services—and, potentially, sell online. Events need one to provide information and sell tickets. Organizations need one to market their cause and solicit funding. Heck, even weddings have websites to easily communicate details to large numbers of people!

The problem for many is that, for a long time, getting a website created involved contracting a professional to build and maintain one—often at substantial expense.

That changed in the late 2000s with the rise of the self-managed, "drag-and-drop" website builder. Now, anyone could simply sign up and start building simple websites with easy-to-use tools—often for free—and only pay when they desired more advanced features.

Today, this business has evolved to enable the self-managed building of full-blown e-commerce sites, subscription services, and even service booking platforms. And at the head of the pack is the Green Screen stock I'm highlighting today, Wix.com (WIX). Is this one for the Watch List? Let's find out.

The Business of Wix

97% of Wix's 280 million users don't pay the company a dime. They use the service to set up simple, often one-off websites to share information. This "freemium" model draws potential customers in and feeds Wix's marketing funnel.

Revenue comes from upselling these users to premium paid tiers. Basic subscriptions allow features like custom domains, the removal of ads, increased storage and bandwidth, and 24/7 support. Now you have a more professional-looking website!

Of course, Wix offers a lot of other subscription options too, depending on what kind of website you're building. E-commerce subscriptions give you tools to accept online payments, manage tax and shipping costs, create email marketing campaigns, sell and manage subscriptions, cross-sell on eBay and Amazon, and much more. Service businesses can upgrade to get tools for managing appointment booking. Event websites can upgrade to sell tickets and manage RSVPs, and so forth.

In all, Wix serves just over 6 million paid subscribers who rely on the company’s platform to keep their "front door"—their website—up and running well all day, every day.

Revenue Growth and Recurrence

Subscriptions to Wix's premium services are recurring and ongoing—customers basically pay the company month after month to maintain their website services as a course of business. Over 86% of revenue comes from recurring sources, making Wix a clear example of a recurring revenue company and fulfilling a key aspect we look for in any potential investment.

Growth has been solid. Revenue has increased at a compound rate of 11.5% over the past 3 years, and 15% over the past 5. Recent results and guidance imply a similar growth rate over the next 5 years. There is plenty of market potential, with the core website creation and hosting vertical estimated at a $40 billion total addressable market (TAM) worldwide. If you add in e-commerce, the TAM balloons to over $300 billion. Both are growing at high single-digit rates annually. All in all, that’s a lot of room for Wix to expand its current revenue run rate of about $2 billion annually.

Moat

Wix is core business software, and like any in this segment, there are meaningful switching costs. Customers who have built critical websites on Wix will be loath to undergo the pain of moving to an alternative platform—unless the advantages are substantial. The firm’s 104% net revenue retention shows it not only retains customers at a high rate, but is able to increase spending from them year after year.

I will note, however, that switching costs with a SMB and individual customer focus are less powerful than with enterprise clients. I would classify Wix's moat as narrow.

Wix is the largest player by a good margin in this space, commanding about 40% of the segment. Its closest competitor is Squarespace, with just over 6 million premium users. In e-commerce, Shopify dominates larger merchants, while Wix mainly focuses on smaller businesses. Weebly, once a major competitor, is being phased out by Block (Square) and is no longer a threat.

Management and Financials

Avishai Abrahami is Wix's CEO and co-founder, leading the company since its inception in 2006 and building it from nothing into a global leader with a market cap approaching $9 billion. He maintains a 3.6% ownership stake, currently worth a tidy $320 million. I'm always looking for vested founder leadership, and that's exactly what we have at Wix.

Perhaps not coincidentally, the firm has been conservatively run and remains financially healthy. Wix carries twice as much cash as debt. After some overspending in the post-COVID period, management returned to a "Rule of 40," meaning it aims for its revenue growth rate plus free cash flow margin to exceed 40 every year. We are seeing that, with cash flow margins over the past few years exceeding 27%.

Risks

I would classify Wix as a medium-risk pick.

The biggest risk is the competitive outlook. There are numerous large competitors like Squarespace, Shopify, and GoDaddy, as well as too many smaller ones to name. There are relatively low barriers to entry in this space. AI-focused website builders present both an opportunity (to develop and upsell new products) and a risk (a springboard for new competitors).

There are also typical SaaS operational risks, like cyberattacks, server downtime, and poor latency, that could drive customers to a competitor. As noted, switching costs are not especially high for smaller clients.

Finally, Wix's valuation has historically suffered from the “Israel discount”. While the vast majority of its customers are in the U.S. and Europe, the company is domiciled in Israel. Historically, Israel-based stocks have traded at slightly lower valuations than U.S.-based competitors. There are some geopolitical risks involved with investing in the region as well.

Conclusion

Wix has all the characteristics I'm looking for in a "green dot" stock: a very high percentage of recurring revenues, good growth opportunities, identifiable moat qualities, proven leadership, and a strong financial foundation. It gets added to the Watch List today!

Now, let's discuss valuation. I've modeled for low-teens percentage growth over the next 5 years—right in line with estimates and historical performance. The company has committed to being a substantial cash generator, so I used a 27% free cash flow margin going forward, along with a modest dilution rate of about 2%. Discounting the results by 11.5%—a relatively high required rate of return—I get a fair value price of $180 for Wix. The stock's current price in the mid-$150s is meaningfully below that, but not quite at our 25% required margin of safety. Therefore, we’ll park it for now and keep an eye out for a buy-in point in the near future.

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