There's no doubt that Stitch Fix (NASDAQ:SFIX), the online clothing retailer that makes personal style an easier thing than ever to discover and apply, has had a fantastic run over the last few years. Some recent turnaround has been seen in the field, however, and Stifel recently changed its rating on the company, turning it from a “buy” to a “hold.” Should you do likewise?
Stifel's Shift Has a Surprising Reason
Stifel's turnaround on the company could easily be seen as a vote of no confidence, as suggesting that investors no longer actively pursue a company's stock usually doesn't come without something that looks like a reason. Stifel has one, but it will prove rather unexpected.
Stifel actually maintains its long-term opinion over the company, noting that it has a positive view overall of the company's long-term prospects. The issue more than anything is that the company's stock has experienced a substantial run-up in the last several weeks. Shares were at a low point back in December, and since, have been on a tear, reaching about 170% of the previously-seen low point.
There's a lot to like about Stitch Fix, Stifel notes, but that kind of gain that fast is not a good sign for future growth. Thus, Stifel pulled back a bit, suggesting those who already have Stitch Fix continue to hang on to it, but that buying any more is just buying into a high.
A Flurry of Declining Sentiment
Stifel's move toward more conservative sentiment is hardly alone in the market, as our latest research notes. Analysts have been moving in a more bearish direction collectively on Stitch Fix for the last three months.
Six months ago, the company had seven “hold” ratings and 11 “buy” to its credit. That actually improved three months ago, losing a “hold” and gaining a “buy.” However, a month ago, clear selling pressure began to kick in as the company added three “sell” ratings to the lineup, along with five “hold” and 12 “buy”. Now, the sentiment has soured further, dropping to three “sell”, seven “hold” and nine “buy.”
Meanwhile, the price target's upward climb has only continued. Six months ago, the price target sat at a share price of $23 even. That jumped to $26.10 three months ago before skyrocketing to a dizzying $64.68 a month ago. The gains continued to this day, as the price target hit $69.55, which actually represents downside potential for the first time in six months.
Rapid Gains Suggest Rapid Falls, But Only Suggest
It would be easy to look at the rapid run-up in share prices for Stitch Fix and suggest that the company has a drop in store in the not-too-distant future. A company that gains almost five-fold since its IPO around three years ago could easily see some downward pressure kick in, if for no other reason than profit-taking.
However, there are certainly reasons to stay in the game as far as Stitch Fix goes. Easily one of the biggest is that this is a wholly online fashion operation. Stitch Fix takes customer data and uses same to set up complete boxes—that's where the term “fix” comes in—of clothing options which it sends to customers. That's the kind of game that was pretty much the only game in town back around this time last year, and should still have plenty of life left in it this year, even as retailers are allowed to re-open.
Moreover, as far as retailers go, Stitch Fix has quite a bit lower overhead. That lack of physical presence isn't just a help amid coronavirus restrictions; it's also a help in keeping costs down. Stitch Fix, at last report, has a total workforce of around 8,000 people, which compares remarkably well to others like Macy's (NYSE:M) who have about 123,000.
Finally, that massive focus on analytics as a mechanism for determining fashion choices certainly doesn't hurt matters. Many businesses have already seen the impact that analytics can deliver, and spotting those sometimes-hidden insights and putting them to work can be a game-changer. The notion of using analytics in fashion, meanwhile, comes with at least the perception that the clothes in question have been “scientifically” determined to be the best choices for a shopper.
Whether or not you get in on Stitch Fix now or take the more conservative view and wait for a better entry point, getting in on Stitch Fix at some point will likely be a good plan. There's a lot of value behind this company, and though it may be taking a little too much of it up front right now like Stifel suggests, the idea that this company will keep going for the foreseeable future is more than reasonable.
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