In early December, Stitch Fix (NASDAQ:SFIX) announced results for its fiscal first quarter, and investors celebrated. The stock jumped over 70% in late 2020. It has since shot up a further 70% in early 2021, to touch $100 per share for the first time.

While there's a lot to like about the online apparel specialist, that rally might set shareholders up for disappointing returns from here on if the business stumbles. So, let's take a critical look at the bullish thesis for this new Wall Street favorite.

A deliveryperson with an armful of boxes rings a doorbell.

Image source: Getty Images.

Many ways to win

Stitch Fix's latest results might seem underwhelming at first glance. Sales growth only landed at 10% in the quarter that ended in early November, and the company generated a paltry $10 million of net income in that period. Adjusted earnings were similarly tiny at just $7 million.

Look beyond those headline numbers, though, and there's clear evidence of growing momentum. Stitch Fix gained 240,000 customers, a record, during what's normally a slow period for the subscription-based business.

The chain also successfully pivoted its offerings to match up with changing customer tastes. Packing its delivery boxes with athleisure and comfort wear led to customers choosing to buy more of its stylists' suggestions. It also demonstrated the company's flexibility and deepening connection with its shoppers.

At the same time, pushing into new product lines such as outerwear, kids, and mens apparel, along with new business models, has management feeling extra confident about the business.

"Our powerful personalization engine is evolving," CEO Katrina Lake said in the Q1 earnings release, "and innovations in our Fix and direct buy offerings will expand our addressable market, deepen client engagement, and grow wallet share over time." That was all music to investors' ears.

Risks ahead

Two key factors work against jumping into that growth story today. The soaring stock price is the biggest, since it raises the risk that you're overpaying for the business. Stitch Fix is valued at close to $10 billion, or almost six times the $1.7 billion it generated in sales last year. You could buy other e-commerce specialists, even quickly growing ones like eBay and Wayfair, at a much cheaper price.

SFIX PS Ratio Chart

SFIX PS Ratio data by YCharts.

The other main risk is that you're buying into a growth idea that doesn't materialize. Sure, Stitch Fix has revealed some hints about its potential to expand into new demographics, markets, and product lines. But Wall Street also found reasons to sour on the stock as recently as late September, when management suggested growth might be harder to achieve through a shrinking apparel industry in 2021. Investors might be even less forgiving after the next stumble, especially given the stock's elevated valuation.

My view is that a Stitch Fix investment delivers some rare factors that can create impressive long-term returns. These include a powerful, innovative, and flexible selling model, industry-leading customer loyalty, and a strong track record for market-share growth. As a result, a decade from now, you're likely to be happy about buying the stock even at around $100 per share.

But to achieve those returns, investors might have to endure several stock-price slumps along the way. If you're not averse to extreme volatility, and you're impressed with the young business, then Stitch Fix might be just the growth stock for you.

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.