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Stitch Fix Is no Longer a Buy, Says Prominent Analyst

By Eric Volkman - Dec 11, 2020 at 4:14PM

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It's not because the company lacks potential, he believes.

One noted stock analyst has scratched Stitch Fix ( SFIX 6.95% ) off his holiday gift list. After market hours on Thursday, it was reported that Goldman Sachs ( GS 2.95% ) prognosticator Heath Terry downgraded his recommendation on the stock to neutral from the previous buy. Meanwhile, he's maintaining his $58 per-share-price target.

It's not that Terry believes the company lacks potential. In fact, he delivered the following more upbeat statement:

We continue to believe the opportunity for StitchFix is significant as the apparel category recovers and the share shift to e-commerce that has happened during the pandemic becomes more apparent, operations normalize, incremental revenue streams like Direct Buy outgrow the core, and retail store closures further force consumers online.

Woman trying on a red dress in a shop as she checks out her reflection.

Image source: Getty Images.

The issue is the stock price, which has risen by nearly 50% this month alone. This was on the back of Stitch Fix's Q1 of fiscal 2021 results, in which it blew past analyst expectations with a 10% year-over-year increase in revenue, which is particularly meaningful given the pullback in spending on non-essential items by many consumers.

The company also flipped unexpectedly to a net profit under generally accepted accounting principles (GAAP), although it was still in the red on a non-GAAP (adjusted) basis.

In the analyst's estimation, while Stitch Fix could have a bright future (particularly within a broad recovery in the apparel sector), in the near term its bottom line will be affected by significant investments it's making in a number of areas. This leads to some uncertainty about the company's profitability, hence the downgrade.

In mid-afternoon trading on Friday, Stitch Fix was up marginally, currently trading at $59.32.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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Stocks Mentioned

StitchFix Stock Quote
StitchFix
SFIX
$25.53 (6.95%) $1.66
The Goldman Sachs Group, Inc. Stock Quote
The Goldman Sachs Group, Inc.
GS
$400.79 (2.95%) $11.48

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