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My Top Growth Stock for 2021

By John Ballard - Jan 6, 2021 at 7:30AM

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This e-commerce stock is ready to take off following a strong finish to 2020.

Investors looking for the next industry disruptor with the potential to deliver wealth-building gains should look no further than Stitch Fix ( SFIX 0.96% ). The platform delivers two things that shoppers highly value -- personalization and speed -- and the company's focus on these attributes is about to take its revenue growth to another level.

The stock price broke out of a two-year slump toward the end of 2020 after management issued a strong forecast for fiscal 2021 in its most recent earnings report. Here's why now is the time to add Stitch Fix to your portfolio.

A retail disruptor

Stitch Fix has all the ingredients of a monster stock in the making. It is a relatively small company, with a $6.2 billion market capitalization. That's 3.5 times its trailing-12-month revenue of $1.75 billion, which is a tiny slice of the $1.5 trillion global apparel industry. 

A woman unboxing a shipment from Stitch Fix.

Image source: Stitch Fix.

Above all, it's a bonus that Stitch Fix is founder-led. CEO Katrina Lake started Stitch Fix in 2011, shipping the first order out of her apartment while attending Harvard. Lake clearly wants to see the stock deliver returns over time, as she holds more than 25% of the company's outstanding shares. 

Even though Stitch Fix saw revenue growth decelerate this year due to a soft consumer spending environment, the business remained on offense. It has continued to invest in its direct buy initiative and innovate with new features, such as Shop Your Looks and Trending For You, that are enhancing the platform's personalization.

The most recent feature, Fix Preview, has a lot of potential to appeal to millions of prospective clients who would like more control over the items their stylist selects. Most importantly, by continually improving the experience for customers, Stitch Fix is staying ahead of competitors, like Amazon's Personal Shopper. 

These investments are paying off. Stitch Fix reported its highest sequential gain in client additions in history in the fiscal first quarter. This performance sets up the company for improved revenue growth in 2021 as new clients begin to engage with the service.

A sleeper growth stock

While revenue growth clocked in at a modest 10% year over year during the fiscal first quarter of 2021, management expects it to accelerate, reaching a range between 29% to 40% in the second half of the current fiscal year. 

Those are impressive numbers. Management expects the 240,000 new clients that it added last quarter to lead to higher spending in the coming quarters, given that Stitch Fix has recently experienced better success rates at predicting what items a client will choose to keep in their Fix. Nearly 80% of clients purchased at least one item in their first Fix in each of the last two quarters, which is the highest level Stitch Fix has reached in five years. 

The improved success rate shows the company's expertise in data science working to its advantage. Stitch Fix is clearly building a powerful shopping platform that could flip the apparel industry on its head over the long term and deliver big gains for investors.

While everyone is talking about the Etsys of the world, Stitch Fix is slipping under the radar, all the while building momentum. That makes it my favorite growth stock to buy right now.

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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