The Roller Coaster Ride For Stitch Fix is Pointing Down After Earnings

After gapping up over 15% after a strong earnings report shares of Stitch Fix (NASDAQ:SFIX) are settling into a tight range. And whereas SFIX stock looked undervalued just three months ago, the stock now appears to be close to fully valued, and perhaps slightly overvalued.  

As a dedicated e-commerce company, the bullish and bearish case for Stitch Fix appears as two sides of the same coin. On the one hand, the return to live events, including millions of Americans heading back to the office is a catalyst for revenue growth.  

On the other hand, e-commerce is now table stakes. And Americans have other options that offer the same curated service that made Stitch Fix disruptive.  

The purpose of this article is to help you understand both sides of this story so you can decide whether to, and how to, invest in SFIX stock.  

Revenue and Earnings Continue to Improve 

Prior to the pandemic, Stitch Fix was a profitable company. However the company reported a loss in three of the past four quarters. This wasn’t completely unexpected. Many Americans had no reason to get dressed for work. Others had no job to go to. It didn’t help that Stitch Fix was not immune to the supply chain issues that were affecting many companies.  

However, analysts were looking to see improvement and they got that. The company narrowed its loss from 20 cents a share to 18 cents a share. This was much better than analysts’ expectations for a 27 cent loss per share. Stitch Fix also delivered on the revenue front generating $535.6 million which was well above the forecast for $511 million.  

And the company improved its forward guidance suggesting that the worst of its supply chain issues may be behind it.  

Americans Are Dressing to Go Back to Work 

Work from anywhere is likely to be part of the new reality for many businesses. However, many corporations have announced plans for employees to return to the office in some fashion. For many this means it’s time to update their professional wardrobe that, in some cases, may have been left unattended for over a year.  

This is a catalyst for Stitch Fix because these items are generally higher priced (and higher margin) items for the company. Not only that, but active accounts grew by 20%.  

However, not everything is bullish for SFIX stock. There are a couple of other negative items to consider. 

The Novelty Has Worn Off 

One of the more concerning headwinds affecting Stitch Fix at the moment is that its business model is no longer disruptive. Other companies, notably Trunk Club from Nordstrom (NYSE:JWN) and private companies such as Le Tote and Cuts Clothing.  

But perhaps the biggest emerging, if not imminent, threat to Stitch Fix is coming from Amazon (NASDAQ:AMZN) through its Personal Shopper service that is available to Prime members. This service allows members to get a curated fix for $4.99 well below the $20 styling fee charged by Stitch Fix.  

A New CEO is Taking the Helm 

Current Stitch Fix president Elizabeth Spaulding will be ascending to the chief executive officer (CEO) position on August 1. Spaulding will be succeeding current CEO and Stitch Fix founder Katrina Lake. In terms of succession plans, this should be a seamless transition.  

Nevertheless, analysts generally don’t care much for uncertainty. Which might explain why SFIX stock is consolidating after gapping up after earnings.  

Is Stitch Fix Overvalued? 

I think so, but only slightly. There is no question that revenue is increasing, but a rising top line with a bottom line that is not showing corresponding growth is a little concerning.  And the company's moat, which was never that large to begin with, is much smaller.

Shares of Stitch Fix have been on a roller coaster ride since the end of 2020. This makes it difficult to say that SFIX stock is a buy. Investors should wait for the stock to pull back closer to its 200-day and 50-day simple moving averages before entering a position.