Please ensure Javascript is enabled for purposes of website accessibility

Why Stitch Fix Stock Popped 10% Today -- Then Gave It All Back

By Rich Smith - Updated Jul 12, 2019 at 5:21PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Goldman Sachs may love Stitch Fix, but not all investors are convinced.

What happened

Shares of online clothing-subscription service Stitch Fix (SFIX 7.16%) jumped sharply in early trading Friday, rising as much as 10% before gravity regained hold of the stock. By the time trading ended for the day, however, Stitch Fix stock was firmly back on earth, giving back all its gains -- and even a bit more.

Stitch Fix stock ended the day down 1.7%.

Two men's hands with one thumb down and one thumb up.

Image source: Getty Images.

So what

So what explains the early bounce, and what might explain investors' failure to stick with the stock?

The first part is easy. Early Friday morning, investment banker Goldman Sachs announced it was upgrading Stitch Fix to buy.

"Product innovation, operational efficiencies, and geographic expansion, combined with the increase in retail store closures (particularly in apparel)" among Stitch Fix's competitors "represent significant opportunities for further outperformance," argued Goldman. It assigned a $38 price target to the stock. Goldman was particularly optimistic about Stitch Fix's expansion into offering plus-size apparel and children's and men's clothing, as well as its expansion into the U.K. market.

As for why Stitch Fix couldn't hold onto its gains even with Goldman Sachs' endorsement, that one's a bit trickier. I presume it had something to do with Stitch Fix's 63 price-to-earnings (P/E) ratio -- and the fact that, based on the latest analyst estimates of a likely 2020 earnings decline, Stitch Fix is selling for more than 90 times forward earnings.

Now what

Assuming I'm right and that Stitch Fix's valuation spooked investors, I don't think there's really any cause for worry. Although it's true that Stitch Fix's earnings aren't as strong as one might like to see when judged by the standard of generally accepted accounting principles (GAAP), data from S&P Global Market Intelligence confirms that free cash flow (FCF) at Stitch Fix continues to outperform GAAP earnings handily -- $57 million to $48 million, respectively.

Valued on these cash profits, Stitch Fix is selling for an enterprise value of about 44 times free cash flow. Assuming analysts are anywhere close to right about Stitch Fix's ability to grow profits at 53% annually over the next five years -- also according to S&P Global -- a valuation of 44 times FCF seems not just reasonable, but even potentially cheap.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

StitchFix Stock Quote
$8.23 (7.16%) $0.55

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/18/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.