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Why Stitch Fix Stock Popped 10% This Morning

By Rich Smith - Sep 9, 2020 at 12:05PM

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Deutsche Bank thinks it has spied a possibly missed opportunity.

What happened

Shares of Stitch Fix (SFIX 4.20%) exploded 10% higher in early Wednesday trading after Deutsche Bank initiated coverage of the online clothing subscription service with a buy rating and a $34 price target.

As of 11:15 a.m. EDT, Stitch Fix shares remain up 6.8%.

3 piles of coins with green leaves sprouting from them

Image source: Getty Images.

So what

So what did Deutsche say to get investors so excited? As reports today, Deutsche thinks Stitch Fix will be "one of the biggest beneficiaries of the ongoing lockdowns and accelerated store closures," as shoppers migrate out of physical retail stores and onto the e-commerce platform instead.

Deutsche is particularly enthused about Stitch Fix's decision to extend its services to non-subscribers, by permitting them to buy clothing items directly, an initiative Stitch Fix will be rolling out over the next couple of quarters. The investment banker predicts this will "materially expand" Stitch Fix's total addressable market, but believes most investors have not yet realized this.

Now what

Stitch Fix stock costs more than 82 times trailing earnings. And despite Deutsche's optimism, so far the pandemic hasn't done much good for Stitch Fix, where sales were down 9%, not up, last quarter, and where both profits and free cash flow have turned negative.

Unless the company can do better than this, I'm not convinced Stitch Fix is worth even the $28 and change its stock is selling for already -- much less the 20% higher price Deutsche projects.

Rich Smith has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Stitch Fix. The Motley Fool has a disclosure policy.

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