Wix's Margin Pressure Driven by AI Investments, Market Sentiment Overly Pessimistic on Growth

What happened

Wix delivered solid Q3 2025 performance with revenue and bookings both growing 14% year-over-year, reflecting steady execution in Creative Subscriptions and faster Business Solutions growth. However, non-GAAP gross margins compressed to 68-69% due to front-loaded AI compute and marketing costs from the Base44 acquisition, leading to investor concerns about structural erosion. The Seeking Alpha article argues this margin pressure is temporary and not indicative of weakening fundamentals, emphasizing strong operating income and cash flow. DeepValue's report aligns with this view, noting Wix trades at an attractive ~16x FCF with a potential buy rating, but highlights risks like Base44's scaling and competitive AI tools. Ultimately, the investment case depends on sustaining low-teens growth and achieving a margin inflection by 2026 as AI costs normalize.

Implication

For investors, Wix's current valuation at ~16x 2025E FCF offers upside potential of 25-40% if margins recover as projected in the base case. Key risks include Base44 failing to hit its $50M+ ARR target by year-end 2025 or competitive pressures forcing persistent discounting, which could drive shares toward the $75 bear case. Monitoring quarterly updates on Base44's user mix and the delayed Self Creator launch in early 2026 is critical to validate the growth trajectory. Entry around $80 aligns with DeepValue's attractive level, but position sizing should account for the earnings-driven margin of safety and high execution uncertainty. Over the next 6-12 months, evidence of margin improvement or Base44 success will be necessary to support a rerating, making this a patient, high-conviction play rather than a quick turnaround.

Thesis delta

The new article reinforces DeepValue's existing thesis that Wix's margin pressure is a temporary result of strategic AI investments, not a fundamental breakdown. No shift in the core thesis is needed; instead, it confirms the view that market pessimism is overdone given sustained growth and strong cash flow. Investors should maintain focus on long-term fundamentals, but remain vigilant on Base44's scaling and competitive threats to avoid downside scenarios.