One noted stock analyst has scratched Stitch Fix (SFIX 1.60%) off his holiday gift list. After market hours on Thursday, it was reported that Goldman Sachs (GS 0.78%) 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.
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.