In newer internet slang, "wig" is a reaction. It means something is so impressive, shocking, or exciting that your imaginary wig flew off.
The American Idol context
The phrase spread to a broader audience when Noah Davis used "wig" with Katy Perry on American Idol. The joke was about being blown away by talent.
Wig vs wigged out
"Wig" as a reaction is praise or shock. "Wigged out" usually means freaked out, panicked, or lost composure.
Bottom line
"Wig" means stunned in a good way. "Wigged out" means overwhelmed or freaking out.