3 Reasons SFIX is Risky and 1 Stock to Buy Instead

What a brutal six months it’s been for Stitch Fix. The stock has dropped 20.7% and now trades at $4.15, rattling many shareholders. This might have investors contemplating their next move.

Is now the time to buy Stitch Fix, or should you be careful about including it in your portfolio? Get the full stock story straight from our expert analysts, it’s free.

Why Do We Think Stitch Fix Will Underperform?

Despite the more favorable entry price, we're cautious about Stitch Fix. Here are three reasons why SFIX doesn't excite us and a stock we'd rather own.

1. Decline in Active Clients Points to Weak Demand

Revenue growth can be broken down into changes in price and volume (for companies like Stitch Fix, our preferred volume metric is active clients). While both are important, the latter is the most critical to analyze because prices have a ceiling.

Stitch Fix’s active clients came in at 2.35 million in the latest quarter, and over the last two years, averaged 16.7% year-on-year declines. This performance was underwhelming and implies there may be increasing competition or market saturation. It also suggests Stitch Fix might have to lower prices or invest in product improvements to grow, factors that can hinder near-term profitability.

2. EPS Trending Down

Analyzing the long-term change in earnings per share (EPS) shows whether a company's incremental sales were profitable – for example, revenue could be inflated through excessive spending on advertising and promotions.

Stitch Fix’s earnings losses deepened over the last five years as its EPS dropped 8.1% annually. We tend to steer our readers away from companies with falling EPS, where diminishing earnings could imply changing secular trends and preferences. Consumer Discretionary companies are particularly exposed to this, and if the tide turns unexpectedly, Stitch Fix’s low margin of safety could leave its stock price susceptible to large downswings.

3. New Investments Fail to Bear Fruit as ROIC Declines

A company’s ROIC, or return on invested capital, shows how much operating profit it makes compared to the money it has raised (debt and equity).

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Unfortunately, Stitch Fix’s ROIC has decreased significantly over the last few years. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.

Final Judgment

Stitch Fix doesn’t pass our quality test. After the recent drawdown, the stock trades at 11.7× forward EV-to-EBITDA (or $4.15 per share). This multiple tells us a lot of good news is priced in - we think other companies feature superior fundamentals at the moment. Let us point you toward one of our top software and edge computing picks.

Stocks We Like More Than Stitch Fix

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