Shares of hyperpersonalized e-retail platform operator Stitch Fix (NASDAQ:SFIX) sunk in early March as a broader tech sector meltdown coupled with a disappointing second-quarter earnings report to take the wind out of red-hot SFIX stock.
Last year, Stitch Fix stock soared 130%. This year, shares are off 16% — and down more than 50% from their recent highs.
What’s the move here?
To buy the dip.
The core fundamentals underlying Stitch Fix — that the company is leveraging a data-driven hyper-personalized engine to create a new era of intelligently curated online apparel shopping — remain healthy. SFIX stock just got way too hot for its own good earlier this year, as it was a short-squeeze stock that got caught up in the GameStop (NYSE:GME) drama.
Now, though, the stock is significantly undervalued, meaning it’s time to buy the dip.
Here’s a deeper look.
SFIX Stock: Bad Earnings
The big catalyst for the plunge in SFIX stock was the company’s ugly second-quarter earnings report.
And let me be clear, it was ugly.
Client growth was healthy, clocking in at 12% with 110,000 net adds. But that was about it on the positive side. Revenue per client dipped 7%. Revenue growth slowed. Gross margins dipped 190 basis points. The opex rate de-levered by 800 basis points. Adjusted EBITDA fell into negative territory. The fiscal 2021 revenue guide was cut from ~22.5%, to ~19%.
Not a pretty quarter.
But, upon closer inspection, the headwinds which impacted the quarter are ephemeral. They will pass. And soon.
Let’s take a closer look at those aforementioned bad numbers.
Revenue per client dropped 7%. Not good. But that’s mostly a mechanical issue, as the company calculates revenue per client by taking revenue and dividing it by the average number of clients in the quarter. Thus, the huge surge in clients skews the denominator higher, and unnaturally deflates revenue per client. Nothing really worrisome there.
Gross margins fell 190 basis points. Ostensibly, troubling. But the contraction is almost entirely a function of a slower-than-expected rebound in the Men’s business, which inflated inventory levels. Sure. Men aren’t shopping for clothes much right now. We’re all at home in pajamas. But, once vaccinations roll around and offices reopen more broadly, men will shop for clothes again. Inventory levels will drop. Gross margins will rebound.
The opex rate de-levered by 800 basis points. From the outside, that looks like a really bad performance. But it’s because of a $15 per hour wage bump to the company’s fulfillment centers. This headwind will stick around. For now. But in time, it will be offset by automation technology. That is, those warehouse employees will be replaced by robots. Stitch Fix should be talking to Berkshire Grey right about now.
The revenue guide was cut by 3 points. Not good. But, again, it’s because of near-term headwinds, like uncertainty surrounding a rebound in the Men’s business as well as some shipping bottlenecks because everyone is shopping online these days. There isn’t anything fundamentally worrisome about these dynamics.
Thus, while Stitch Fix’s numbers were bad, the reason they were bad is not bad. Sounds weird. But it’s true. And that’s why I like SFIX stock on this dip.
Still Pioneering a New Way to Shop
Zooming out, Stitch Fix is still pioneering a new way to shop for clothes, which is fundamentally superior to the way we currently shop for clothes.
This disruption boils down to three huge value-additive features of the Stitch Fix business model.
First, Stitch Fix is online. This one is obvious. Most apparel shopping still happens offline. But a lot of that shopping has been shifting online for the past several years. This trend will persist, because online shopping offers significant convenience advantages over offline shopping, and to the customer, convenience is king.
As such, Stitch Fix makes shopping faster and more convenient through digitization.
Second, Stitch Fix is personalized. Consumers love smartly personalized experiences. Stitch Fix leverages shopper and fashion trend data, puts all that data into advanced data science models, and creates smartly personalized shopping experiences, built on curated apparel assortments that are unique to each user. In so doing, Stitch Fix is essentially morphing into everyone’s personal stylist, which should improve shopping outcomes for consumers.
As such, Stitch Fix makes shopping better and smarter through personalization.
Third, Stitch Fix is (mostly) a subscription business. As much as consumers love smartly personalized experiences, they equally love subscription business models for their consistency and convenience. Stitch Fix turns shopping into a subscription business model through monthly “clothing boxes”.
As such, Stitch Fix makes shopping more consistent and easier through subscriptions.
It doesn’t take a rocket scientist to connect the dots. Through its unique, hyperpersonalized e-commerce platform built on the back on subscriptions, Stitch Fix is making shopping faster, more convenient, better, smarter, more consistent, and easier.
Stitch Fix is simply improving the shopping experience. That’s why this company has a compelling opportunity to turn into the future of apparel shopping — and why SFIX stock is a long-term winner.
Valuation on Stitch Fix Stock
In early 2021, Stich Fix stock got caught up in the GameStop drama, wherein heavily shorted stocks of all sorts suddenly surged as retail investors forced hedge funds to cover their short positions.
As a result of that short-squeeze, SFIX stock shot up into overvalued territory in early 2021.
This premium valuation has since been eroded. Now, SFIX stock is undervalued.
Long term, I see Stitch Fix as a platform that should be able to more deeply penetrate middle- to upper-income households to the tune of ~10% annualized client growth over the next decade. At the same time, new features like Direct Buy should gradually boost average revenue per client over time at a ~2% annualized pace. Thus, this is a low double-digit revenue grower into 2030.
Gross margins should improve with higher spend per client. Opex rates should fall with economies of scale as this is a scalable e-retail platform. Long-term, operating margins have potential to rise to 15%.
On those basic modeling assumptions, my modeling suggests that SFIX stock is worth at least $70 today. That represents about 50% upside potential from current levels.
Bottom Line on SFIX Stock
The recent tech sector meltdown has created multiple golden buying opportunities. SFIX stock is one of those great buying opportunities.
But it’s not the best buying opportunity.
Instead, the best buying opportunity is in a company that reminds me of a young Amazon (NASDAQ:AMZN). Indeed, I think buying this stock today could be like buying AMZN stock back in 1997 — before it soared thousands of percent.
Which stock am I talking about?
On the date of publication, Luke Lango did not have (either directly or indirectly) any positions in the securities mentioned in this article.
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