Stitch Fix (NASDAQ:SFIX) is plunging by over 30% Tuesday following its earnings announcement after the bell Monday. Despite beating on earnings, the San Francisco-based personal style company fell after revenues failed to meet expectations. Now, the company must convince the public that growth for SFIX stock will continue. With the innovative capabilities of competitors, and the likely ability by some to offer this service for free, I recommend that investors stay away from Stitch Fix stock.
Stitch Fix Earnings
Stitch Fix reported 17 cents in earnings per share (EPS) for Q4, 13 cents ahead of estimates. Unfortunately for SFIX stock holders, Wall Street fixed its focus on revenues. While revenues of $318.3 million came in 23.2% higher than last year’s levels, analysts had been looking for $318.9 million.
Guidance for the upcoming quarter also corrected modestly. Analysts had predicted six cents per share in earnings on revenues of $360.1 million. The company matched the earnings guidance but predicted revenue would come in between $354 million and $360 million.
The company also announced an expansion into the U.K. This could serve as a solution to its stagnant client base. This base of 2.7 million customers represents 25% growth from where it stood last year. Still, it also shows no growth from the previous quarter.
Lacking a Moat Will Unstitch SFIX Stock
I see this negative news as a good excuse to sell SFIX stock. I realize that even after the post-earnings plunge, the stock rose after I panned it back in July. This swoon likely validates that I was not wrong, just early in my criticism.
On the surface, this looks like an innovative fashion company who stumbled upon a brilliant concept that can facilitate a difficult process. In reality, SFIX exists as an upstart data company employing machine learning.
Despite this fact, I like the company’s concept from a service standpoint and understand its appeal. However, I see it as the only significant offering of a $4 billion startup. Much larger clothing retailers and data companies (namely Amazon (NASDAQ:AMZN) and Alphabet (NASDAQ:GOOGL, NASDAQ:GOOG)) could create software that performs the same function. Nordstrom (NYSE:JWN) already has this function in-house since they took over Trunk Club.
Still, I believe its destiny lies in becoming a service that Amazon and other online retailers offer for free to boost clothing sales. What will SFIX stock do then? Perhaps Target (NYSE:TGT) or a Macy’s (NYSE:M) could try to buy them out. However, with the stock trading at around 200 times earnings, most will likely pass. Given the history of Blue Apron (NYSE:APRN), Helios & Matheson (NASDAQ:HMNY), and other companies without a moat, I think this will become an eventual penny stock. A buyout at that point will do current stockholders little good. Hence, I see little choice but to sell.
The Bottom Line on SFIX Stock
The latest quarterly report shows investing in SFIX stock stands as a fashion mistake in the making. The company showed impressive earnings and revenue growth, despite revenue coming in below estimates. However, the fact that this company saw no quarterly subscriber growth should concern investors. The move into the U.K. will address this subscriber growth issue only temporarily.
However, that does not address SFIX’s Achilles’ heel — the lack of a moat. All it takes is a company offering this service for free to sink Stitch Fix stock. Such a move could easily happen.
Moreover, with its approximate $4 billion size, it’s unlikely to out-innovate the mega-cap companies that hold a capability to enter this space. Unfortunately for holders of SFIX stock, this equity will more than likely find itself on the clearance rack. Even then, it will likely remain overpriced.
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.