Data science has again brought the world a new app in the form of Stitch Fix (NASDAQ:SFIX). Stitch Fix combines data and human judgment to provide clothing styled to the customer’s needs and desires. The company has impressed Wall Street since its initial public offering in November, more than doubling in value over the last six months. However, given the changing nature of fashion and the array of choices, I would caution against paying a premium for SFIX stock.
The Stitch Fix Advantage
To be sure, Stitch Fix’s has taken personal clothing shopping to a new level. The company’s ability to combine personal preferences and current fashion trends changes the nature of personal shopping. Clothing preferences remain personal for many people. Hence, choosing the right clothes remains difficult without such help.
Currently, SFIX stock is the only equity directly engaged in this business that has also gone public. Its competitor Trunk Club was taken over by Nordstrom (NYSE:JWN). Other peers such as The Daily Look or Wantable remain private companies. Amazon.com (NASDAQ:AMZN) and eBay (NASDAQ:EBAY) also offer online clothing. Amazon even accommodates customers who want to try on clothes with Prime Wardrobe. However, unlike Stitch Fix, this lacks a personal shopping feature.
SFIX Stock’s Advantage Is Tenuous
While one has to admire a company that can get ahead of Amazon in the retail world, I see long-term issues. One of them that InvestorPlace’s Josh Enomoto points out well involves the fickle nature of fashion. Even the most successful firms in the business struggle in this area. Although the fashion industry has existed for centuries, the clothing industry remains fragmented.
Moreover, what little moat a company can build and maintain in this industry centers around data science. The team with the data scientists that can most accurately estimate an individual’s fashion preference and combine that with current trends will become the most successful. SFIX stock maintains the lead in that niche for now. I think the question becomes how long and how well they can stay ahead of their peers? If the competition catches up to them, Stitch Fix becomes merely another online clothing company. This does not mean they will fail. However, it calls into question the ability to maintain a competitive advantage.
The current high valuation of SFIX stock will hinge on that very advantage. The fact that the company operates at a profit bodes well for the future of Stitch Fix. However, SFIX stock currently supports a price-to-earnings ratio of 75. It will struggle to maintain such a PE if competitors start matching them. Moreover, profit growth remains uneven. Analysts predict that forecasted profits of 20 cents per share will fall to 12 cents per share in 2019. They expect profits to again rise to 25 cents per share in 2020. Even with uneven growth, Stitch Fix stock should continue to prosper for the foreseeable future.
Time will tell whether and how much this growth will help SFIX stock.
Final Thoughts on SFIX Stock
Competitive threats — as well as the struggle to maintain its technological edge — bode poorly for the long-term future of SFIX stock. Without a doubt, Stitch Fix deserves accolades for improving personal shopping and the ability to move ahead of its peers. However, fashion remains a fickle business where holding on to market share and maintaining continuous growth is a struggle.
Also, while it enjoys the most success in the data science area now, keeping such a lead will become difficult over the long run. I expect Stitch Fix will thrive in this industry for years to come. However, given the long-term competitive threats, I would not sew SFIX stock into one’s portfolio at this price.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.