TIVP075 (Video): WIX: The Most Asymmetric AI Bet? w/ Daniel Mahncke & Shawn O’Malley

17:15Shawn O’Malley:And then, of course, last year they had the acquisition of Base44.

17:19Daniel Mahncke:So is it right that you've used both Wix Harmony and Base44?

17:24Shawn O’Malley:I did use both, but unfortunately, I didn't have the time to take on any larger projects. It was mostly about figuring out the main differences between them. So I would say the main difference that I found is that Wix Harmony still works much more like the original Wix version. So you can prompt the first layout of the website, but it doesn't get too much into the details, right? It still feels like you will end up with what more or less looks like a template. and then the prompting beyond this initial website is also not working perfectly with the details, I would say. It's kind of easier to do a lot of things yourself via drag and drop after you have this initial template built.

18:01Shawn O’Malley:So it's a mix of prompting and it's a mix of drag and drop essentially. And at least that was my first impression. Perhaps some people out there have also tried Harmony and they feel like it's significantly better now with the details than when I've tried it. Base44 is much more AI native and there's no drag and drop at all. Instead, the prompting works much better and it goes into much further detail. And it's also not really a website builder either. Base44 is supposed to program things like CRMs, entire tools, or entire apps.

18:30Daniel Mahncke:So does Base44, just to be clear, does it have its own AI? Or is it really just running on other LLMs that are sort of integrated into it?

18:40Shawn O’Malley:Here's a good question. Base44 works with Gemini and Cloud, so it's not their own AI. and that's basically the same for all of these tools. So any of the competitors, Lovable or Cursor, they're all also using Gemini, Claude. Some of them probably also use OpenAI's ChatGPT. So the way it works generally is that when you send a prompt to Base44, Base44 would forward that prompt to Claude or Gemini and they're actually the ones writing the code. Now, you might ask yourself, and I did that in the beginning, why do you even need an app like Base44 in the first place? and I'm sure we'll get into more details about that later but just briefly, after you have the code you still need to host the app, you have to run databases and you perform authentication, for example, you know with our tool, there are obviously different authentication processes in terms of us getting into the portfolio review tool and others just having access to the submission page and all of that is handled by Base44 and you, as the user, you don't have to face any of that complexity and it might not sound like it but it can quickly get complex on the backend.

19:44Shawn O’Malley:And again, Base44 basically takes all of that and you don't even see it. And now that you say it though, I should mention that Wix has actually just announced that they built their own LLM, but not for Base44, but for Wix Harmony. And Wix's CEO, Avishaya Brahami said, quote, importantly, our model empowers us with more control of AI inference costs. As we scale the Harmony platform with little to no reliance on third-party LLMs, We expect this to be the first of many custom Wix-built AI models, which is becoming increasingly central to our product roadmap and long-term profitability strategy.

20:21Daniel Mahncke:I guess I shouldn't be surprised because it feels like everybody and their mother has an LLM these days. But it looks like there are more business units for us to discuss, or at least more products than I initially expected. And so perhaps it helps if you can just give another overview, maybe of the entire Wix business. which segments does Wix report? How does it break it out in its financial statements? And how are they performing? If you're a fundamental investor like me, you need a research terminal that actually keeps up with you. That's why me and my colleague, Daniel Monka, use Fiscal AI for every episode of the Intrinsic Value Podcast that we do.

20:55Daniel Mahncke:It's the complete stock research terminal built for people who care about the numbers. Fiscal AI pairs a modern interface with institutional grade data. It has over 20 years of financial statements, 40 quarters of history, and company-specific segments and KPIs that I love digging into. Want Google's cloud revenue? It's there. You want to see Duolingo's monthly active users? It's there. And I know because we did that in our episode on Duolingo. There's millions more data points too, all updated within minutes of earnings, not days later like legacy platforms. You can export data, run screeners, pull earnings call transcripts and morning starter reports, track super investor holdings and compare companies head to head just like me and Daniel do, and even plug Fiscal AI into Claude to power your AI research with institutional quality data.

21:43Daniel Mahncke:Head to fiscal.ai slash T-I-V-P. You'll get two weeks off Fiscal Pro free. And if you upgrade that same link, we'll save you 15 % on any paid plan. Again, And that's fiscal.ai slash T-I-V-P. If you're listening to this show, you're already doing the work most investors won't. Tearing into individual businesses, pondering intrinsic value and thinking in decades instead of quarters. At some point, you start to want people to do that work with, though. That's why we built the Intrinsic Value Mastermind Group. And you've probably heard me talk about the Intrinsic Value community before. And this is that same space with the name Refresh.

22:23Daniel Mahncke:It remains a home for serious long-term investors committed to compounding their knowledge, relationships, and finding great stock ideas. And as a member, you'll join monthly video calls with me, Kyle Grieve, and Daniel Maka, where we'll dig into what's actually happening in the markets and in individual businesses. You'll sit on private conversations with fund managers, business operators, and authors that we respect, the kind of access that does not fit inside of a 90-minute podcast. You'll have the chance to join us in roaming Omaha together during Berkshire weekend too. One of my favorite weekends of the year.

22:58Daniel Mahncke:If you're looking to expand your circle of investor relationships, get smarter about assessing intrinsic value and are always looking for new stock ideas, then what are you waiting for? Apply for free now at theinvestorspodcast.com slash mastermind. That's theinvestorspodcast.com slash mastermind. And if your application stands out, I'll be reaching out to you personally to schedule a call.

23:21Shawn O’Malley:So they have a couple of products, but only two major reported segments. The first one is Creative Subscriptions, which did about$1.4 billion in revenue last year in 2025. And it's growing in the low double digits. So we're talking 11 to 12 % growth. And that's pretty much the legacy SaaS part of the business. And then the second segment is Business Solutions, which generated close to$600 million last year. And it's growing close to 20%. And that's the segment where Wix is monetizing all the backend tools. So again, I know you love payments. So the main part of it is Wix payments. And that basically works so that when a small business processes a payment through Wix's integrated checkout, see, we're getting there again, it's payments.

24:04Shawn O’Malley:Wix takes a cut. And I think the transaction revenue specifically came in at about a quarter billion last year. And that's also growing about 20%. And that's mainly driven by, first of all, more transaction volume and total, and then also them increasing the takeaway. So business solutions is mostly payments and then plus some of these smaller pieces like CRM, email tools, stuff like that.

24:28Daniel Mahncke:Just so everybody's on the same page, Daniel is teasing me about my love for payments because I actually don't love payments. I've said many times that I can't wrap my head around payments businesses. So anyways, it's still pretty remarkable to look at the revenue chart here and it looks like it just goes up in one straight line. So pretty much no volatility. And it's almost like an Adobe financial chart, which I say with some hesitation, because I don't think Wix is anywhere near Adobe's quality, even though Adobe has also been pegged as perhaps being an AI loser. But Wix's reliable growth here is still pretty impressive.

25:05Daniel Mahncke:And so it supports the idea that Wix's retention is very high. And maybe they do have some pricing power that's supporting the business.

25:12Shawn O’Malley:I gotta say though to defend Sean here that the payment companies that we had in our portfolio also didn't perform that well so perhaps it's a good bias to have so another important number is partners revenue and it's not a standalone segment it's pretty much part of both so the core business and also the business solution segments because obviously they're spending you know money across both of those products so the so-called partners are mainly agencies and freelancers, kind of what we talked about before. And what that means is that they build sites for other people. So partners generated about$750 million last year, which is roughly 38 % of total revenue.

25:50Shawn O’Malley:And it's also growing more than 20%. So we're still talking about a company here that shows not only pretty good financials, but also pretty healthy growth. And I think that's a good sign, especially for the partner revenue, because freelance web designers, they are running 10 or 20 different client sites on Wix Studio. and that just means they have much higher switching costs just because you know obviously it takes more time rebuilding 20 sites compared to just one especially when you have to explain to all those different yoga teachers that suddenly their dashboards will look different from before and if you then consider that you probably only do that to save let's say a couple hundred bucks a year i think that's not the most attractive value proposition so as the partner share grows the share of Wix revenue that's particularly vulnerable to vibe coding should go down over time.

26:40Shawn O’Malley:That said though, and that's quite important, and part of why the stock dropped 30%, this quarter has actually been the first where partner revenue was almost flat quarter over quarter. And interestingly, you don't immediately see that in the filings because Wix shows you the year over year comparisons and they would still show 20 % growth. Quarter over quarter though, they have actually flatlined.

27:00Daniel Mahncke:It's not necessarily a great sign when you see that, right? If management had a good explanation for that, they might have made an extra effort to point this dynamic out, even if they're used to showing the year-over-year comps. And so I really think it's more important than ever for companies that are sort of caught in the crosshairs by the market's fears of AI right now to really prove that they're not hiding anything. So another number that fits into the bear argument against Wix is that their premium subscriber count peaked in 2023 around 6.3 million and has since declined by 200 ,000 paid subscribers.

27:40Daniel Mahncke:So are those perhaps the first signs of AI disruption?

27:45Shawn O’Malley:I don't think so. I mean, those data points, especially right now, they certainly don't help the narrative. But the decline was planned by management to mostly focus on these higher value, more deeply embedded customers. As I said, again, if you look at the cohorts, the newer ones make significantly more money than the older ones. So Wix aggressively raised prices on the lower tier plans by some accounts up to 50 to 100 percent. And they basically let the churn on the low end happen. So, I don't know. I mean, you always got to be skeptical when companies say that they lose subscribers, but that's actually what they wanted to do.

28:18Shawn O’Malley:But since they've alluded to that in the earnings calls before it actually happened, I think we can take this as a case of not AI impact, but actually just business strategy. Also, there are a lot of KPIs that actually underscore that thesis. So if you look at revenue and bookings, they are still growing at a healthy clip, and they have actually started to meaningfully re-accelerate since 2023. So we're talking about total bookings growth that has actually tripled, going from 4 % back to 13 % last year. And then probably even more important, especially for a value case like today, margins expanded significantly as well.

28:54Shawn O’Malley:So the business solution gross margin went from 28 % to 34 % by the end of last year. And that's a six point expansion, while revenue also grew double digits. And as you pointed out, net revenue retention is 105%, which means existing customers in aggregate are spending 5 % more this year than last year after accounting for every customer that churned after these price hikes. So I think the one big risk, and we might still talk about this later, but I kind of want to bring it up here already is that there will be one LLM provider that reaches what everybody's calling AGI, this, you know, huge level of intelligence and outperforms all the other models by a wide margin.

29:34Shawn O’Malley:And if that's the case, this model agnostic nature of Base44, Lovable, and all these other tools, which basically just means they could use Cloud, but they could also use ChatGPT and they could also use Gemini, that is pretty much useless at that point because there's only one model that is doing a significantly better job than all the other ones. The only argument left for them at that point would be that they are specialized in building websites and tools while these still more general LLMs might not be interested in actually building all the backend stuff to then create a competitor for these VibeCoding tools.

30:09Daniel Mahncke:It does remind me of the arguments for how Duolingo could survive LLM disruption, right? learning a language through chat gbt or gemini or even claude is pretty much impossible i think it's fair to say and it's just going to take so much longer and the experience is not optimized to keep you motivated to come back right there's no gamification there and duolingo really excels at that and so i think with all that said building a website also doesn't require you to come back regularly though in the same way that learning a language with where you're you know building a streak every single day. And so the best case for them would be to really have people spend as little time as possible fixing the website once it's built, because that's sort of what you would want as a user experience.

30:56Daniel Mahncke:So what I am asking myself now is whether it's truly an advantage for tools like Base44 or Lovable to be solely focused on building websites. Because if it's not their own AI, but they're using Cloud or Gemini, then is it really even a long-term advantage that they've built by being focused on just one sort of niche. Is it like an agent or how should I think about the role that Base44 plays?

31:22Shawn O’Malley:That's a good question. And I think I should clarify that. So when I say that Base44 runs on Claude or Gemini, that basically means that it cannot be quote unquote trained, like an agent, for example, on any skill in particular. So Base44 is a wrapper that sits on top of Claude and Gemini, for example, then tells them what to do when you prompt it. And simplified, pretty simplified, that's what's happening. So what differentiates base 44 from Cloud is, as we said before, the infrastructure that comes with it. So one thing that I noticed while running this project with Cloud Code is you still need all sorts of additional stuff.

31:59Shawn O’Malley:And that can sound complex when you've never heard of it. So for example, you first need a directory, which means nothing else than having a folder structure where you can actually have all the tools that you need and put everything and save it there. then you would need to think about whether you want a Python backend or a Node.js backend. And at that point, I would assume most people probably say, it's a bit too much. It's a bit too complex for me. I just want to have this yoga set running. And for those who actually make it through that, you now have to decide which database you want to use.

32:31Shawn O’Malley:And the point that I tried to make here is that while you don't really need to code anything anymore, there are a lot of things you still need to decide and know about. and it's pretty unlikely that you know exactly what you're doing and that it's actually faster if you're not a software developer. Base44, you just give it a simple prompt and then basically the entire backend is taken care of by itself. Once the code is written and you use Base44, your app is live much quicker. It has a functioning URL, which is also something that you don't immediately have through Cloud Code. You can click that URL and actually use the app and you can also share that URL with whoever you want to.

33:06Shawn O’Malley:So for example, if I finish my tool, I would send that URL to Sean and say, hey, what do you think about this? And he says, that's great, let's stream it. And that's what you want to do in as little time as possible. And again, I kind of know now that all of this backend stuff doesn't have to take forever and isn't necessarily difficult. But I mean, I had literally a rocket scientist walked me through the entire process. So I don't think there's a way where I would have chosen this approach over something like Base44 on my own and then also get it done as quickly.

33:36Daniel Mahncke:Yeah, I think it's no secret which one I would have preferred. You lost me when you talked about just having a directory for the cloud code approach. I don't think I could even get OpenCloud, which is a slightly different thing, installed onto my computer when I tried to run it. I still haven't quite figured out how to do that. So if anybody wants to help me with that, I am a little, not the most tech savvy, let's say, but let's talk about Cloud itself, right? What about them? So they released so many features and it's become so easy to quickly code simple app, supposedly, for people besides myself.

34:10Daniel Mahncke:Is it a threat that Claude could focus on simplifying things a lot to cater to people like me, where, you know, Claude code seems a little too complex still to use?

34:23Shawn O’Malley:It certainly is. I mean, we just a couple of weeks ago uploaded a call or a presentation hosted by one of our members about AI. And he basically said one thing that keeps coming to my mind, and that's that all the tools that we currently have, they are still the worst AI tools we will ever have. So if you think about what especially Claude has done in the past, and you think about what's possible in the next couple of years, it's almost unimaginable that they wouldn't be able to create something like this. Probably they would be able to do that tomorrow if they wanted to. the big question that i always come back to and that for now i haven't found an answer to is what makes the most economic sense for those large llm providers i have no doubt again that claude could achieve this if they wanted to and that's the same for all the other llm providers but you know to give you an example just like amazon could dominate brazilian e-commerce if they decided to outspend mercado libre and shoppy by let's say effect of 10 the question is how much of these higher ROI projects would they leave on the table if they do that.

35:27Shawn O’Malley:And you can't do everything on your own. You know, that's one of the lessons of capitalism. And I assume that it's more profitable for these big LLM providers like Claude right now to be this sort of toll booth business that works in the background of tools like Base44 or Lovable. And as long as there's not one LLM that's better than all the others by a wide margin, they can't really pressure companies like Base44 too much on the margin side either. At least that's what I think. And at the same time, they can also not easily compete with every somewhat related tool out there. But again, the argument is that it makes more economic sense for Claude or Gemini to be this sort of base for a company like Base 44, no pun intended.

36:10Shawn O’Malley:And if that changes, that's the bare case right there.

36:13Daniel Mahncke:So let's get back to the core business for a second. And if anyone with an AI subscription or even just base 44 can spin up a website faster than they can sign up for Wix, doesn't that almost mean the marginal new customer wouldn't need Wix at all? The one thing that isn't yet entrenched in the Wix ecosystem with Wix payments and CRM and email marketing, they may never even reach those touch points. So I think a potential risk is that the core of Wix's business is a sticky platform for maybe existing customers, but won't be able to funnel any additional customers into that ecosystem in the future.

36:52Shawn O’Malley:There's no getting about the fact that it will be much harder to acquire customers going forward than it has been in the past. And even if we assume that Wix is still a helpful tool and LLMs or other tools aren't significantly better, there's just so much more competition that the customer acquisition costs would certainly go up compared to where they've been in the past. Also, you know, with everyone talking about AI, I think it will be much harder for people to choose a tool that is not AI native, because you, to some extent, feel like you don't have the newest tool, and you will just don't get the best product, because you don't work with the most up-to-date tech.

37:28Shawn O’Malley:Although, again, Wix has obviously also integrated AI as well. And if you would look at any of their ads, obviously, they are talking mostly about, hey, Wix is also integrating AI. If you want to build a website with AI, Wix is the place to be. Another problem though is that Vibe coding tools will add most of the backend features that Wix offers over time as well. So you likely can't even argue that the more serious users, small and medium businesses, for example, will still go to Wix for the backend stuff. It's just a hugely commoditized space. Let's be real here. And Lovable, for example, kind of showed you that they have integrated Stripe by now for payments and it's not a huge burden to do that.

38:08Shawn O’Malley:And when management talks about the backend in earnings calls, it always sounds like it's this huge competitive advantage. But in reality, it just doesn't take much for competitors to just copy these features.

38:20Daniel Mahncke:To bring up a more positive point here, it seems as if Wix is incredibly good at marketing. And for every dollar they put into marketing, they generate multiples of that in the next two to three years. And so the payback time is less than a year. and one thing they do is actually pay LLMs to show up in the answers when you ask them you know what's the best tool to build a website from scratch with and so I actually tried that myself I asked chat gbt what tool I should use when I want to build a website for say a new yoga fashion brand that's going to compete with our portfolio holding lululemon and I tried to do so without any coding skills and its first recommendation was wix it's interesting because before I heard

39:02Shawn O’Malley:about that. I didn't even know that you could already pay LLMs to show up in the results. I thought that's something that's planned, but I didn't know it's actually already out there. As a side note, though, you really have to type in that you have no coding skills. Otherwise, and that kind of shows you the competition in that sector. The first result I got was Shopify. So, you know, that says something about how difficult it will be also in the future and also maybe how much you have to spend in advertising going forward to still show up as the main tool for building a website. Generally, I don't want to bring down my own case here, but it would just be intellectually dishonest for me not to say it.

39:39Shawn O’Malley:So the competition in this space has never been more intense and there's no sustainable competitive advantage. And I only focus so much on this. And once again, I talked to members about this, is that when you deep dive into a company and you listen to the CEO so much, it's so easy to get lost in the narrative and to kind of feel like, hey, you know, they talk so much about the backend. Apparently it's way harder than I thought. to integrate all of these tools and it's a way stickier product than it is it's not you just look at the competition and they're all integrating the same tools obviously if you have a website with wigs for years you're just unlikely to change that so it's a sticky product but there is no mode in general and the switching costs are low so you know the assumption with today's case is that there will be more than one winner for tools like base 44 and also for tools like wigs though its current sticky customer base can be a cache engine to support base 44 which then also in turn becomes one of the more dominant ai native web builders and you know the perhaps biggest advantage here and they also talk about that is the distribution that wix can offer base 44 if you combine 300 million registered users over 6 million paid subs there's just a lot of cross-promoting opportunity for base 44 and the founder of base 44 maura shlomo said this was basically the main reason for the deal.

40:56Shawn O’Malley:So the biggest advantage for an AI Vibe coding tool right now in 2026 is financial backing and distribution. And Wix, fortunately, can offer both. And to get back to the cohort data once more, we clearly see how much more profitable cohorts become over time. So, you know, the Q1 2010 cohort, customers Wix signed up 16 years ago, has generated roughly $50 million in cumulative bookings, the Q1 cohort of 2015 has generated roughly five times that. And that's basically the trend that you've seen over time as well. And if AI were eroding the customer base, so the more recent cohorts, the ones basically acquired during the AI hype cycle, I think you should see a trend of deterioration relative to the older ones.

41:38Shawn O’Malley:That's clearly not what you see. I mean, the Q1 2025 cohort is actually the strongest one after all of the COVID cohorts, which obviously, that was a huge tailwind because everybody's staying at home. Everybody who is also 16 years old and has some entrepreneurial spirit thought they would have to build a website and sell some tools. So that was obviously a good time for Wix and also in part why the stock suffered so much after COVID, but that's a side note.

42:03Daniel Mahncke:One feature you told me about that sounded pretty cool was that Wix is actively working on making pages readable for agents. And so in a future where I might not be booking yoga class appointments myself, but I'm letting an agent book it, then it's really important for that website to be easily accessible to agents. And so while they should look and care for the same things that I would care about, agents do browse websites differently. And so when I tell my agent to find a yoga instructor in my neighborhood with good reviews and book an appointment for Saturday morning. It's important that the AI finds the right type of business, sort of has an idea of what I'm really truly looking for and has access to my calendar and is able to then book the appointment.

42:50Daniel Mahncke:And all that sounds easy, but websites that are built for humans are not necessarily easy to navigate for AI. So that's maybe the simplest explanation to give. And so Wix has now addressed that problem and made its websites indexable by LLMs, which means they're set up in a way that these AI models, LLMs, can easily browse it and act on their websites.

43:15Shawn O’Malley:It's basically another lever to pull in terms of SEO, right? Search engine optimization. And that's one of the things that matters pretty much a lot for the people who have Wix websites because that's part of this all-in-one package that you want from Wix. You want to build a website, have all the backend tools and also the SEO included. And that's something you don't get by vibe coding something yourself with Claude. But it's also not an advantage, that's pretty much everything that we talk about today, over any other website builder because it's not an investment you can make based on the idea that you have this superior engine, for example, or superior tool that will outperform competitors.

43:54Shawn O’Malley:And that's why the stock can suddenly start compounding because you're just having significantly better margins of financials. So what you get, to kind of summarize here, is a business that has sticky customers, exceptional margins still, and also one of the fastest growing AI tools in the market. And all of that is trading at just four to five times cash flows.

44:15Daniel Mahncke:Well, considering that, let's take a moment to talk about the financial quality of the business. Because I have to admit, I was surprised when I saw the margin profile and profitability of this business?

44:26Shawn O’Malley:The first thing to point out is that revenue growth is accelerating instead of decelerating, as I talked about before. And it's not a lot, which went from somewhere like 12.5 % to 14 % now. A more significant inflection can certainly be seen in the free cash flow margins, which went from 2 % in 2022 to 30 % today. And one reason for the bad margins in 2022 was mainly overhiring during COVID. Again, this was a part of the business where it went pretty well. And obviously everybody thought this would go on for a couple more years. And the management team apparently did so as well. Wix has over 5 ,000 employees by now.

45:01Shawn O’Malley:And I wouldn't be surprised if we see further margin improvement over time by saving more costs, which obviously also means letting go of some of those 5 ,000 employees. But that was also significant operating leverage. So the take-rate expansion through more backend services increased the business solution margins by six percentage points in the last two years. And in dollar terms, that actually means that free cash flow has 19x in the last three years. So you can also use the rule of 40 framework, which is something that you often try to put companies into perspective, especially when you talk about these SaaS companies.

45:37Shawn O’Malley:So revenue growth plus free cash flow margin should be above the number of 40. And Wix actually hits 43 % right now, and they're aiming for the rule of 45 by 2026. So you can't say that this is a tier one SaaS profile, at least in terms of the financials, perhaps not in terms of the mode. And again, the downside, as with so many of the other software companies right now, is also stock-based comp. So stock-based comp is roughly a quarter billion, 240 million to be exact. And that's on an annualized basis, of course. So SBC adjusted free cash flow lands closer to$360 million, or about an 18 % margin on revenue.

46:16Daniel Mahncke:So what about the drag from base 44? Because you mentioned earlier that it has been pulling the consolidated numbers down. So could we see even more potential in terms of margins when base 44 continues to scale and hopefully becomes more profitable along the way?

46:32Shawn O’Malley:Yeah, I mean, the first impact is just the acquisition itself and the expenses that came with that. So Wix only acquired Base44 again in mid-2025. So it's still a recent deal, which is also why R &D suddenly jumped in 2025 after basically three years of being more or less flat. And perhaps it makes sense to just generally give some more background on Base44 and the founding story and the entire acquisition process. We talked a bit about how it works and how it functions, but I think this kind of gives background that's also important for the listener. So the founder, again, is Maurer Shlomo, and he's an Israeli engineer who built a venture-backed data company before he founded Base44.

47:12Shawn O’Malley:And by his own account, he was somewhat burned out on the VC playbook by the time he stepped away. And his wife apparently ran a small business. I don't think it's yoga. For some reason, we always talk about the yoga business today. I don't think it was that. But, you know, since he had some free time on his hands, he thought, why not help her out a bit? So he was tinkering with software, which is kind of what he does, to help her manage her schedule and customer database. And like every tech savvy guy, he decided to check out some of these new cool AI native tools to do so. So I think he used Lovable and Replete, two of the competitors for Base44.

47:48Shawn O’Malley:And he kind of found them frustrating to use and not really as accessible to non-developers as they should be, because, you know, that's their primary marketing claim. And obviously with the founder DNA still in him, he decided that gap in the market was worth filling and he built Base44. And he basically bootstrapped it. So he paid LLM inference costs out of his own pocket. And then he started posting built-in public updates basically on LinkedIn. And the posts pretty much went viral. And within three weeks, Base44 had 10 ,000 users. And that's already quite the success, I would say. But only 12 weeks later, it was 150 ,000.

48:28Shawn O’Malley:subs and roughly$1 million in ARR. And you know, considering that there wasn't a single dollar spent on marketing in what even at that time was already a pretty competitive field, I think that's a pretty insane result.

48:40Daniel Mahncke:That's not too shabby. It makes me rethink the effectiveness of LinkedIn. We were pretty negative about it on our Microsoft episode after having very little success in our attempt to do some advertising prospecting via LinkedIn's premium subscriptions.

48:59Shawn O’Malley:Yeah, I think organic traffic, you know, in the end might work out a bit better for that. And also it's somewhat of a different thing to talk about a new flashy AI product compared to finding some advertisers on LinkedIn. Anyway, I mean, that trajectory basically caught Wix's attention. And then both companies, which are based in Tel Aviv, kind of found together. And I believe Also, the founders, they kind of knew each other through the local tech scene in Tel Aviv. And Wix eventually reached out and they closed the deal in 2025. Again, about$80 million up front in cash, plus on outs running through, I think, 2029 in case they hit certain ARR targets.

49:37Shawn O’Malley:And at the time of the deal, Base44 was at roughly$3 million in ARR.

49:42Daniel Mahncke:Since this has become a much bigger part of the thesis today, I expect it has grown quite fast.

49:50Shawn O’Malley:It did, certainly. I mean, you know, if you pay$80 million for a$3 million in ARR, that might sound like a lot today, but just a year later, the company is making$150 million in ARR. So the strength of Base44 and its partnership with Wix, again, is mostly distribution. So for example, how does that look? 12 days after Wix acquired Base44, they booked a Super Bowl ad. And I mentioned this because every company we cover on the show that has or had a Super Bowl ad, you bring it up every time. So I thought, you know, I have to do that today too. And as someone who doesn't watch the Super Bowl, I know what's the wrong sport, still do it.

50:27Shawn O’Malley:And football is better. Just know my two cents on that. And, you know, I'm also not into this halftime show thing. So I'm always surprised by the impact of those ads. But I mean, I looked at YouTube and Base44's ad has almost 500 million views on YouTube. So I don't know, I guess the$20 million spent on the Super Bowl ads for both Wix and Base44 was certainly worth it.

50:50Daniel Mahncke:No, it does sound like money well spent to me. It's about our portfolio holding CoStar hasn't had the same luck with paid marketing and Super Bowl ads for homes.com.

50:59Shawn O’Malley:Although I like that spot too. I watched it before your pitch on YouTube and I think both ads were pretty good. Maybe it's a factor that AI might be a bit more flashy currently, as I said. And, you know, beyond just the advertising budget, Wix has over 300 million users globally. And that's one of the most efficient SMB-focused marketing engines in software. So there's, again, this huge cross-promoting opportunity that certainly helped Base44 to grow significantly faster than it could have on its own. And the financial backing obviously matters too. I mean, if you look at these competitors like Lovable, like Bold, like Replete, all of those are standalone Vibecoding companies.

51:37Shawn O’Malley:and they basically have to raise capital every, I think it's like 9 to 12 months because they burn in cash so quickly that they need more cash to keep growing relatively quickly. And Base44 now being under Wix's umbrella doesn't have that pressure since Wix generates these$600 million in free cash flow annually to help boost Base44.

51:57Daniel Mahncke:Speaking about burning money, what do the unit economics actually look like here? Because Base44 is running deeply negative margins forever, right? Of course, that changes the attractiveness of Wix as this seemingly cash printing machine type business.

52:13Shawn O’Malley:Well, according to the management team, Base44's paying user gross margin is already positive and is expected to grow much more in the future. I think the main reason is that AI inference costs are heavily front-loaded. So that means that users generate a lot of prompts during the build phase, then fewer during maintenance, when basically your tool or your website is already set up. So mature cohorts are dramatically cheaper to serve than the new ones, but obviously they're making the same amount of money for base 44, which is why the consolidated margins look worse in the beginning than the underlying economics would actually suggest.

52:47Shawn O’Malley:there was also a comment that llm costs to base 44 are down about 30 percent since the acquisition partly from model provider competition and partly from what's called internal routing optimization which is a complete way of saying that easy to handle prompts are given to a less powerful and thus cheaper model so i don't know let's say i want to change the color or positioning of a logo i don't need claude's latest deep thinking model to do that that could easily be handled by one of the open source models, which obviously in turn would also be cheaper to use than Claude. But we don't have any specific numbers.

53:23Shawn O’Malley:You know, in the interviews I watched both with Shlomo and also with the other founders or the competitors like Lovable, for example, none of them is actually giving you the numbers on how much they pay the model providers. And I don't know, in terms of long-term economics, Wix's CFO said that he would expect Base44 to converge on operating and free cash flow margins similar to the WIX score in the long term. And that would basically mean roughly a 30 % free cash flow margin eventually. And I think you mentioned that 2027 is supposed to be this inflection point for margins. So obviously they don't reach 30%, but then they should be more meaningfully positive.

54:01Daniel Mahncke:Let me just take a shout out and summarizing how I understand what we would actually be buying if we were to add this WIX with base 44 combination to our portfolio. And so the idea is that you have this asymmetric bet with Base44, which is fastest growing Vibe coding tool out there, backed by structural distribution and let's say capital advantages from Wix. And so it's not about Base44 being the best product. That's just impossible to copy though. The price you're paying for this Wix Base44 combination implies that base 44 is worth basically nothing. And Wix itself would only be worth three to five times free cash flows at the current market valuation.

54:45Daniel Mahncke:So of course, this is not a case similar to our intrinsic value portfolio holding Exer that we mentioned earlier, where the actual asset value of the firm is higher than the market cap. But if you have a company that is generating cash flows in the range of 300 million to$400 million a year after adjusting for stock-based compensation and has a billion dollars in cash, then a market capitalization of$2.4 billion seems very, very reasonable. And then you get all this potential upside of base 44 for free, right? So that's sort of the logic of the picture.

55:22Shawn O’Malley:I couldn't have said it better. And it's also worth noting that all of base 44's public comparables are trading at multi-billion dollar valuation. So Lovable is valued at$6.6 billion. Replete is valued at$9 billion. And Cursor, which to be fair, is a lot further in its journey, is valued at almost$30 billion. Now, if you ask me, those companies are very likely to be overvalued. So I wouldn't buy any of them at current prices. I don't know. I mean, getting one of them in base 44 for basically free for like$0, that doesn't sound like the worst deal to me.

55:58Daniel Mahncke:The last big thing I think we should walk through here is capital allocation, because you told me that the management team has done some things in the last 12 months that might seem a little bit odd.

56:09Shawn O’Malley:Yeah, so let's start with the positive things first, although you can even argue that it doesn't look as smart anymore after the recent earnings report. But in late 2025, Wix's board authorized a$2 billion share repurchase program. And to put that into context, Wix had a market cap of about$4 billion at the time. So this was basically a buyback authorization for roughly half the company. And as listeners might know by now, we love buybacks a lot. You actually sent me a chart recently that showed some of the biggest share cannibals. And it's kind of funny because we own quite a lot of them. And even among them, no company is buying back 50 % of its shares.

56:47Shawn O’Malley:So another thing I liked is that they executed these buybacks via a Dutch auction, which is also something that we know, right?

56:54Daniel Mahncke:We do know about these Dutch tender auctions from, and I'll bring it up again, Exer. But just to explain the concept once more and why we like it more than the approach of just doing open market purchases for share rebuybacks. The way it works is that shareholders submit the price at which they would be willing to sell their shares back to the company. So the company then gets to set basically the lowest clearing price that fills the buyback. And so everyone who bid at or below that price gets the clearing price. And so that ends up being cheaper typically for the company more often than just buying in the open market where you can be bidding against yourself and pushing the price up.

57:39Shawn O’Malley:In Wix's case, about 17.5 million shares were retired for approximately$1.6 billion. And that's probably 30 % of the float in a single transaction. By the way, most sites haven't yet updated Wix's share count, which is often why you see a higher market cap and also more expensive valuation metrics than the actuals and what we mentioned here in this episode. So you should pay attention to that. If you're on any side like fiscal AI, for example, probably when this comes out, they should have updated it. Now, the only problem is, and that's what I alluded to in the beginning, is that after the massive drop of over 30 % recently, buying back shares at$92, which has been the price, doesn't seem that smart anymore.

58:21Shawn O’Malley:And as of today, the stock is trading at$55. So the same buyback just 10 weeks later would have bought back closer to 50 to 60 % of the company instead of 30. So if you still want to see the positives, I think the fact that the management saw the stock as being undervalued in the low 90s and basically committing this massive buyback program should be somewhat reassuring that at$55, probably getting an even better deal.

58:48Daniel Mahncke:So there's one other aspect of this capital allocation picture I think we need to look at. And so around the same time of what we're discussing, Wix did a private placement with a firm named Durable Capital. So they were buying back shares at$92, but then issuing new shares at a discount to Durable Capital. How exactly does that add up in your mind?

59:13Shawn O’Malley:Yeah, I can't give you a perfect argument on that. And Durable Capital is who I mentioned, Henry Ellenbogen, before in the beginning. So when I said that Robert Vinales basically sold his stake and Ellenbogen came in, that's basically the way that he did it. So to summarize, there was a$250 million private placement to durable capital, which is set at roughly a 5 % discount to market with attached ones that struck at, I think it was a 25 % premium and a one-year lockup. And the official explanation is that Wix wanted to lock in a long-term institutional shareholder. As I said, that the fund that Henry Allenbogen is managing is mostly known as patient capital with a long-term growth orientation.

59:56Shawn O’Malley:The unofficial read is probably that this was about shareholder composition rather than the balance sheet, because it's not like Wix needed cash since they had plenty of cash on the balance sheet for the$10 offer that they had. So bringing Ellenbogen on potentially insulates Wix from these short-term activist pressure that might come up during a period of multiple compression, right? When your stock is going down that much, there's a chance that an activist is coming in and is trying to gain control over the company. And also, this is not a huge negative because it's not like this deal has been massively dilutive.

1:00:30Shawn O’Malley:I think it was about 4 million shares from the placement, plus 1 to 2 million potentially from the warrants, which don't look like they will ever exercise. And compared to that, the 17 and a half million shares that were retired through the buybacks, they're just significantly more. So if you net that out, the share count still came down dramatically. But of course, just the optics of buying at$92, then issuing at a discount in the same quarter. Then also having the stock coming down to$55 just 10 weeks later, that's a pretty bad look for the management team.

1:01:01Daniel Mahncke:We're talking a lot about the stock. What about the debt? You mentioned a billion in cash at a$2.4 billion market cap. So without debt, the enterprise value would actually be$1.4 billion, right? You subtract out the net cash. And at that point, Wix and base 44 would trade way below one times ARR and two to three times your cash flow. So that might be the lowest price I've ever seen for a highly profitable SaaS business with double-digit growth.

1:01:30Shawn O’Malley:The only debt that Wix has is about$1.5 billion in zero coupon convertible notes, with conversion strikes well above$200 per share. So at$55, the convertibles are deeply out of the money, almost as far out of the money as possible. So I think the economic cost of carrying them is essentially zero. And Wix is borrowing money for free because also the coupon on those convertibles is near zero. So the only cost is dilution if the stock quadruples and the convertibles actually kick in, which I don't know about you, but if the stock is quadrupling, I think I could live with the dilution coming from that.

1:02:07Daniel Mahncke:Yeah, it would be a high class problem to have, to say the least. How about insider ownership though? When Wix's management team thought the stock was massively undervalued at$90, and now we're sitting well below that at around$55, you would expect the management team to have a significant stake in the company personally and to be buying shares hand over fist, right?

1:02:30Shawn O’Malley:This is one of the many yellow flags, I gotta say. I mean, this is a hit or miss case, right? I mentioned that in the beginning. And if Wix or Base44 are still just relevant in five years' time, they don't need to be striving, but if they are just relevant in terms of market share that they currently have, I can't see how the stock is not a multibagger from these prices today. But if you told me that they won't exist anymore in five years time, I wouldn't be surprised either. Now, why do I say this? Avishai Abrahami, the founder and CEO of the company right now, should know best which case is at least more likely.

1:03:03Shawn O’Malley:And on earnings calls, he seems pretty confident. So why is he not buying any stock? He owns about 1.5 % of the company. And I don't know about you, but I think that's pretty low for a 20-year founder, CEO of a public company. And there's been no major individual insider buying for quite some time now. So management will likely defend this by pointing out to the$2 billion buyback that they've done and kind of say, you know, this is an expression of conviction in the cheapness of the stock. But I don't know, personally, seeing one of them invest in my mind would be a greater signal of confidence for me.

1:03:38Shawn O’Malley:And the fact is, they're not doing that. Nobody in the management team is. And, you know, dropping another one of our mastermind Omaha discussions, we also talked about how you can get lost in the narrative when you do too much work. And that's what I mentioned before. And I just feel like Wix is exactly a candidate for that. And if you just want to look at one or two things that you can kind of see whether this makes sense to you, insider buying would actually be the one. I mean, there are a lot of companies by now in the SaaS world where the CEOs are actually buying a lot of their stock, right?

1:04:08Shawn O’Malley:And I mean, we've seen insider buys of about$100 million to some extent. And the fact that this is not the case for a company trading this cheaply right now, at least to me, that's somewhat of a yellow flag, certainly. I mean, you know, you've seen a 30 % stock drop just recently. So maybe we will see some insider buys. But I would probably even say that before we do that, I would also wait with getting any type of engagement in this stock. And if I want to be bullish on Wix and also Base44 in the long term, I think you could argue that it's kind of like a payments or brokerage company. I know you don't like payments, but maybe brokerages are a bit better.

1:04:44Shawn O’Malley:So basically the structure or the dynamic in those industries is that there are a few competitive advantages, but the product is just very sticky once you've onboarded a customer. So I would argue that website builders are in the eye of the storm when it comes to disruption right now, but potentially this huge customer base that Rix already has, then the ability to convert those to perhaps also be base 44 customers. That's the one thing I would double down on.

1:05:10Daniel Mahncke:It's a calculated gamble. I mean, I'm looking at your model here right now, and that's exactly what this all looks like. As long as things are business as usual for Wix, this company should return maybe 20 % plus per year over the next five years to shareholders. And in a bull case, I mean, you can quickly imagine that number going up to above 40%. But then on the other end, in a bear case, this is a business getting massively disrupted and there's really no floor to how bad things could be besides the stock just going to zero.

1:05:43Shawn O’Malley:Right. I mean, just going through some of the assumptions for why we talk about 20, 40%, it doesn't take that much. I mean, the base case is assuming that the WIX business is slowing down slightly over the next few years, while base 44 grows in importance. And obviously, it's a bigger part of the business and kind of starts dominating the revenue growth overall. So overall revenues would then grow about 11 % per year, again, mostly through base 44 growth. And I assume that in 2030, base 44's margins would be 15%. Again, Wix's management team thinks they should reach 30 % eventually. And if I then apply a multiple of nine, which to be fair is a double from today, but also I feel like nine times free cash flow for a company growing double digits, it's not unreasonable to assume that.

1:06:28Shawn O’Malley:and then you use the discount rate of 10%, which is higher than the 8 % we usually use, but you know, there's certainly increased risk here and a margin of 20%. That would give you a return of about 20%, as you said. And then in the bear case, I expect a significantly more severe downturn in Wix's core business and that base 44 basically won't be able to fill the gap. So perhaps you have the app growing, but it's not going fast enough. and you also don't see the margin to actually replace this significantly more profitable core business in Wix. So if you want to put numbers on it, revenue use then only go at 2 % and margins basically collapse.

1:07:05Shawn O’Malley:And if that's the case, as you said, there is no bottom for Wix stock. You have no physical assets. There's no tangible value in this stock. And I could imagine that the cash that would be earned along the way would either be spent on buybacks or perhaps it's reinvested into the failing business of base 44 at that point. And you know then, in the bull case, because we always need a bull case, if you assume that Wix keeps cruising like it is right now, but base 44 is achieving a growth rate of 50 % annually for the next five years. And I know that sounds like a lot, but again, right now it's growing 50 % every 12 weeks.

1:07:40Shawn O’Malley:I also expect a faster margin expansion, reaching 20 % in 2030, and a free cash flow multiple of 15, which to be fair, like to reach a 15x multiple on free cash flows for Wix, all of the AI fear has to be gone. Basically, you kind of need a narrative change from Wix is a victim of AI to Wix is a winner of AI through base 44. And, you know, that's when I would say you could argue that some of this multiple expansion is certainly justified. If all of this happens, Wix will be a multi-bagger. And let me say that in this case, you know, know, sometimes we label them as like bear case, best case, base case.

1:08:18Shawn O’Malley:And you could think that we think each of them is either equally likely, or maybe you just assume that the base case is the most likely. Perhaps it is the most likely, but I would certainly say that in this case, probably I would even say that in this case, I would give the bear case a possibility of 40%. The base case also a possibility of 40%. And then the bull case, a possibility of 20%. So I certainly think that you are closer to the lower end of my assumptions here. But if you're not, you will have a huge payout, even just in the base case.

1:08:51Daniel Mahncke:The incredible thing to me here is that we're talking about a company that made an acquisition less than a year ago or about a year ago. And now that small acquisition that they made is basically the premise of the entire company's future growth. Two years ago, Base44 had no connection to Wix. And now we're talking about Base44 as being the savior for the company. And so on the one hand, if things go well with Base44, this will be like an all-time capital allocation success, right? In terms of right as the business is about to get massively disrupted and killed, they just pull out this reverse Uno card and they turn things around with base 44.

1:09:39Daniel Mahncke:So as much as I would love that story, because it's a great story, there's another part of me that's thinking, man, in this time of AI, things are moving so quickly and changing so quickly. And as quickly as things can come and be given to you, they can be equally quickly taken away from you. So that makes me really hesitant about base 44. And I got to say, when you told me you were pitching Wix, I really almost immediately thought, okay, well, there's no way this is going to end up in our intrinsic value portfolio. And I don't think it is going to end up in our portfolio, but you have maybe sold me more than I expected.

1:10:17Daniel Mahncke:I don't encourage gambling, but if you can responsibly gamble and that helps you get some of this aggressive risk-taking out of your system with the rest of your investments. And I don't think it's necessarily a bad thing to do. And so, yeah, I mean, from time to time with small amounts of money, I let myself gamble a bit. That's something I've talked about in the past. And Wix here seems kind of like the perfect candidate for something like that. I almost don't even want to know more about the company. I just like the idea of rolling the dice with some call options maybe on Wix. Yeah, I don't know if I'll end up actually doing that, but that's sort of how I think about this one.

1:10:54Daniel Mahncke:And so I've got no idea what's going to happen to the business. And it may be nothing good, but I can also see why betting that Wix as a cash cow can persist longer than the market thinks while also betting that base 44 will be a success. I mean, I can see why that's an interesting bet or maybe a fun bet to make, to better say. So whenever we start talking about gambling though, that does not typically bode well for a company being added to the portfolio.

1:11:23Shawn O’Malley:So I got to say, I would say it's a success that I've kind of convinced you that this could be a good gamble. Like even when I looked at the company and thought about pitching it, I kind of had an idea it would make it into the portfolio. It's also not in my personal portfolio right now. But as you said, like for a calculated gamble, it does not look like it couldn't work out at all. Actually, I think that a lot of times what you have with value traps is that you buy them when they drop, I don't know, let's say 30%. But the multiple is still at 15. You think, okay, 15 is reasonable. It's a great company.

1:11:55Shawn O’Malley:This time though, you just have so little room left for a lower multiple, except for, you know, if you assume that in the next two or three years, Wix's free cash flow will drop dramatically. Currently, if you look at the financials and also the structure of their long-term contracts, it looks like Wix will earn a lot of money at least for the next two or three years. And at that point, you're already at a level where you say the multiple is so low and the market capitalization is so low that they're likely on a good chunk of money before they could even go broke. But as you said, one thing that I've seen in the last year after we covered 70 companies, mediocre companies or bad companies, if they surprise you, they surprise you to the downside.

1:12:35Shawn O’Malley:So I know that I couldn't sleep well and that I would basically know, well, in two days, Wix is reporting earnings. Will we suddenly see a 30 % decline of free cash flow because a whole lot of customers is not there anymore? So, you know, value investing means prioritizing your downside risk, not optimizing for the upside. And investing in Wix feels like the latter. I think Wix can be a nice gamble from here, but those are not really the place that we look for. So again, would I feel comfortable sleeping with Wix in my portfolio? Maybe as a gamble, a very small position, but beyond that, probably not.

1:13:08Shawn O’Malley:All right. Let me close it for today with a quote from, we're talking about Wix. Who else in Buffett, right? immediately comes to your mind when we talk about Wix. So we have Buffett reminding us why investing in highly innovative industries is so difficult. So he said, the key to investing is not assessing how much an industry is going to affect society, how much it will grow, but rather determining the competitive advantage of any given company and above all, the durability of that advantage. I'm sure Vibe Coding will be bigger in five years than it is today, but I have absolutely no idea whether Base44 and Wix will still be involved in it.

1:13:46Shawn O’Malley:And with that, I hope this case was interesting nonetheless, and we will see you all again next week.

1:13:53Daniel Mahncke:Just a quick note before you go, this episode would not be possible if it weren't for our friends at Fiscal AI. It's our complete stock research terminal that Daniel and I use on every single episode and with every company we dig into, pulling 20 years worth of financials, digging into segment data, grabbing quotes from the latest earnings calls, and making use of real-time institutional-grade data all in one place. And if you want to try it yourself, well, head to fiscal.ai slash T-I-V-P. That'll include two weeks of Fiscal Pro for free and 15 % off if you upgrade to a paid plan. That's fiscal.ai slash T-I-V-P.

1:14:32Daniel Mahncke:Thanks for listening.

1:14:33Shawn O’Malley:Thanks for listening to TIP. Follow the Intrinsic Value Podcast on your favorite podcast app and visit theinvestorspodcast.com for show notes and educational resources. This podcast is for informational and entertainment purposes only and does not provide financial, investment, tax, or legal advice. The content is impersonal and does not consider your objectives, financial situation, or needs. Investing involves risk, including possible loss of principle, and past performance is not a guarantee of future results. Listeners should do their own research and consult a qualified professional before making any financial decisions.

1:15:05Shawn O’Malley:Nothing on this show is a recommendation or solicitation to buy or sell any security or other financial product, hosts, guests, and the Investors Podcast Network may hold positions in securities discussed and may change those positions at any time without notice. References to any third-party products, services, or advertisers do not constitute endorsements, and the Investors Podcast Network is not responsible for any claims made by them. Copyright by the Investors Podcast Network. All rights reserved.

1:15:47Thank you.