Stitch Fix's (NASDAQ:SFIX) stock price is up over 500% since its initial public offering three years ago. The shares didn't go anywhere for a few years, but in the last few months, the stock has shot to the stratosphere.

The personalized styling service suffered a setback during the pandemic with revenue growth decelerating during the worst of the crisis. But with management forecasting revenue growth to accelerate back above the 20% level in the year ahead, the recent breakout in the stock's performance could be just the beginning of more gains to come.  

A woman opening a box of clothes.

Image source: Getty Images.

What's driving growth

Shopping for new clothes can be a big waste of time. There are countless brands to choose from, and then there is the inevitable hassle of returning items that don't fit. Stitch Fix is gaining market share by solving these problems with its client-first experience. Its data algorithms can narrow tens of thousands of items down to a few dozen based on each customer's preferences.

When a client opens the Stitch Fix app, it's like a custom-tailored store filled with items specially curated just for them. A client knows that everything they see on the screen will fit, and everything has been matched to suit their style.

This personalized experience is enhanced by the numerous data points Stitch Fix collects on each client through Style Shuffle, an app where clients rate items with a thumbs up or thumbs down. The company has collected six billion of these ratings. Although there's a lot more to its recommendation process, Style Shuffle is an important tool that helps improve the company's algorithms. Stitch Fix recently reported a 50% increase, on average, of app-engaged users playing Style Shuffle daily, reinforcing the fun of using the service to discover new brands and styles.

Stitch Fix has seen revenue more than double over the last four years to $1.71 billion -- it's still a relatively small company. What's impressive is that this growth happened even with several competing styling services available online, and Stitch Fix has emerged as the one to beat in this space. 

Management is paying attention to Amazon's Personal Shopper offering, but they see the company's main competition as the retail dollars that are still spent in brick-and-mortar stores. Even though e-commerce has been around for a few decades now, more than 85% of all retail spending in the U.S. is still spent in physical stores, which is quite incredible. The trick is to capture those dollars, which management estimates is a $400 billion opportunity, and bring them over to Stitch Fix. 

How Stitch Fix is winning more customers

Stitch Fix continues to innovate by improving the experience on its platform. The company's Direct Buy feature is a major differentiator for the brand. With Shop Your Looks and Shop by Category, Stitch Fix is taking the personalization of the service even further by allowing clients to buy recommended items outside of a regular Fix. These new browsing features make the service more fun for clients, since it shows other items that would look good with previously purchased merchandise while helping clients create the perfectly styled outfit.

With Direct Buy, Stitch Fix is becoming the ultimate personal shopping assistant as opposed to the perception that it's a subscription service that only sends you a box of clothes every month. 

The company continues to report steady growth in new active clients, evidence that the launch of Direct Buy is working as intended. In the most recent quarter, the company's client base grew 10% year over year, reaching 3.8 million, but management expects this growth to accelerate over the next year. 

Overall, management believes revenue will grow between 20% to 25% in fiscal 2021, which is consistent with pre-pandemic levels. 

Can the stock climb higher?

Stitch Fix clearly has a winning formula, but with the stock up 175% in just the last three months, is it a no-brainer buy? 

It might seem odd to see the stock jump so much in such a short period of time, especially since the company reported 29% revenue growth in fiscal 2019, and the market didn't respond much to that performance. 

You could make the argument that the stock was undervalued less than six months ago with the shares trading at a price-to-sales (P/S) ratio of around 1.6 at the end of September. That was very low compared to other e-commerce stocks, most notably Amazon.

SFIX PS Ratio Chart

Data by YCharts.

With management expecting revenue growth to reach a range between 29% to 40% year over year by the second half of fiscal 2021, not to mention the massive long-term growth opportunity Stitch Fix faces, it seems the share price has simply caught up to where it should be trading on a price-to-sales basis.

I recently called Stitch Fix my top growth stock for 2021. While I don't have a crystal ball for where the stock will go in the near term, it seems clear to me that with the investments in Direct Buy, improvements to its recommendation capabilities, and the acceleration in growth management expects this year, Stitch Fix is emerging from the pandemic as a major disrupter in the retail industry.

These are the kinds of stocks that can deliver big returns over many years, so from that perspective, Stitch Fix looks like a no-brainer investment to me.

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.