Shares of Stitch Fix (NASDAQ:SFIX) have been on a roller coaster ride ever since the online personalized styling service hit the public markets at $15 per share in November 2017.
On the first day of trading, SFIX popped 20% at the open. That rally faded, and by the next day, shares were trading below the $15 IPO price. A few good quarters and less than twelve months later, the stock had soared above $50 in 2018. Less than twelve months after that, it plunged to $17 in 2019 as growth slowed.
Now, in early 2020, Stitch Fix stock is acting strong again. Shares are up more than 20% over the past three months, and the stock presently trades hands at a multi-month high price-tag of $24.
The big question now: Will recent strength in Stitch Fix stock persist for the rest of the year?
I think so. The fundamentals indicate that Stitch Fix is due to have a good year. Meanwhile, the numbers indicate that if Stitch Fix does have a good year, the stock could explode higher.
Stitch Fix Is Due for a Good Year
Central to this bull thesis is the idea that the U.S. economy is improving. That is, throughout 2018 and 2019, U.S. economic activity slowed amid escalating U.S.-China trade tensions, recession fears, and an inverted yield curve. In 2020, though, U.S.-China trade tensions project to meaningfully de-escalate, recession fears have abated, and the yield curve has normalized. Thus, economic activity — including consumer spending trends — should improve in 2020, providing a favorable backdrop for Stitch Fix.
Beyond this, though, Stitch Fix appears positioned to have a good year for two additional reasons.
First, consumers will become more comfortable with automated technologies and methods in 2020. Sure, Stitch Fix isn’t pure automation. But, in some senses, the Stitch Fix service does leverage data and algorithms to “automate” the shopping process by curating clothes for shoppers.
This is a novel idea. Novel ideas take a while to catch on, but Stitch Fix has been around for five years now. With over 3 million active clients, it seems like Stitch Fix has enough scale to drive mainstream adoption over the next few quarters. This should propel sustained huge active client growth.
Second, Stitch Fix added major new features to its service in late 2019, including direct-buy, which allows clients to choose and purchase items directly on the app or website. It has had healthy adoption rates so far (one-third of clients used direct-buy last quarter), and continued uptake of this new service will steadily and significantly increase Stitch Fix’s revenue per client.
With both client and revenue per client growth set to remain robust in 2020, Stitch Fix looks due for a year of big growth quarter after big growth quarter, the sum of which should drive SFIX stock higher.
Stitch Fix Stock is Primed to Rally
Stitch Fix stock is a great position to rally in a big way if the company’s growth trajectory does remain robust in 2020.
Consider this. SFIX trades 30% off its 52-week high and more than 50% off its all-time high. Also, SFIX stock presently trades at 1.6-times trailing sales, which is awfully close to an all-time low valuation for this stock. Even further, the consensus sell-side analyst price target on SFIX stock is $31, more than 30% above where shares trade today.
In other words, when the Stitch Fix story is firing on all cylinders, there is clearly appetite out there for SFIX stock at much higher prices and much higher valuation levels, and analysts think that SFIX stock is set to get to those much higher prices soon.
I agree. The Stitch Fix story will fire on all cylinders in 2020. Client growth rates will accelerate higher as more and more consumers pivot towards curated shopping services. Revenue per client growth rates will remain robust behind strong consumer spending trends and direct-buy expansion. Profit margins will continue to improve with scale and optimized ad spend.
As all that happens, investors will get excited again. When SFIX investors are excited, SFIX stock tends to explode higher. Don’t be surprised if this stock passes the $30 mark at some point over the next twelve months.
Bottom Line on SFIX Stock
Stitch Fix is due for big growth in 2020, and that big growth should propel even bigger gains in SFIX stock.
As of this writing, Luke Lango was long SFIX.