Online-personal-shopping subscription -firm Stitch Fix (NASDAQ:SFIX) has been on a roller-coaster ride over the past month. Stitch Fix stock skyrocketed earlier in March following the company’s better-than-expected quarterly results, but SFIX stock gave up those gains soon afterward, as investors took profits and skepticism about the firm’s near-term outlook returned.
Investors cheered Stitch Fix stock following its second-quarter results, reported earlier this month, which sent Stitch Fix stock over $33 per share. Strong client-growth figures and better-than-expected margins were partly responsible for the gains of SFIX stock, but a big part of the reason for SFIX’s 30% post-earnings bounce was the firm’s poor first-quarter results.
Earlier this year, Stitch Fix stock got hammered after SFIX provided lackluster guidance during its Q1 earnings conference call. The headwinds, it turns out, weren’t quite as strong as SFIX had anticipated and so the gains of Stitch Fix stock in the wake of the company’s Q2 results were even more exaggerated.
Stitch Fix Stock Falls Again
However, the $30+ price tag didn’t last long. Just as quickly as it rose, Stitch Fix stock fell back below $27 per share as investors took profits. That decline offered investors who missed the earnings pop a second opportunity to take a position in SFIX stock. But is Stitch Fix stock poised to rally again?
SFIX appears to be well-poised to deliver more consistent growth in the long-term. The company’s business model is disruptive to the retail industry, and as one of the first of its kind, the firm has solid brand recognition. If you’re buying SFIX stock, you’re essentially investing in the tech behind the firm’s subscriptions, not its fashion offerings.
Stitch Fix has been building an algorithm by adding data points from each new customer’s preferences. That algorithm is designed to make people spend more with each new box they order. As SFIX adds more and more data, theoretically customers will increase their spending because the boxes they are offered will become more appealing.
I have to admit that I’m not 100% behind SFIX’s business model. To me, receiving a bunch of garments that I didn’t choose and having to send back many of them doesn’t sound all that exciting, but the company has found a market for the element of surprise that its boxes offer. Plus, SFIX is working to offer its customers more than just a subscription box, as it’s developing a new feature that could help it grow its bottom line substantially.
A study by Second Measure found that Stitch Fix’s customers are more willing to spend at other clothing retailers like Nordstrom (NYSE:JWN) during the 12 months after they’ve signed up for SFIX than they were before joining the personal-shopping firm. To capitalize on that trend, SFIX has decided to offer an “Extras” option, in which customers can choose and add basic items like underwear to their boxes.
Blue Apron or Amazon?
InvestorPlace’s Luke Lango says Stitch Fix is “in the early innings of changing the way the retail world works.” He thinks Stitch Fix stock will make its way to $40 per share in the near-term and $60 over the longer term. From that perspective, SFIX stock looks like a pretty good buy.
I’m not quite as optimistic as Lango, though. In a lot of ways, Stitch Fix feels a little bit like Blue Apron (NYSE:APRN); are people going to remain members of the service long-term? How long until it loses its novelty? I don’t see SFIX disrupting the retail industry significantly unless the firm continues to build out its “Extras” option in order to allow a little more customization.
To me, the Second Measure study underscores the idea that people aren’t really in Stitch Fix for the long- term. They want a refresh and some new suggestions, but ultimately people want to choose their own clothes. Is SFIX’s algorithm good enough to replace traditional shopping? That’s what investors need to ask themselves before they take a position in SFIX stock.
The Bottom Line on Stitch Fix Stock
While I’m not quite as optimistic as Lango, I’m not saying Stitch Fix stock is a dud. In fact, I think the recent decline of SFIX stock offers a great opportunity to buy the shares. The second-quarter results pointed to more strong growth ahead, and I think Stitch Fix stock will definitely beat the market in the medium-term.
However, the owners of SFIX stock will have to buckle up because it appears the volatility surrounding Stitch Fix isn’t going anywhere, so as long as you’re willing to sit through some peaks and valleys, now is a great time to buy SFIX stock.
As of this writing Laura Hoy was long AMZN.