If you invested in The Lovesac Company (NASDAQ:LOVE) when it went public in June 2018, then you've more than tripled your money. Often when a stock crushes the market like this, it's because the business has done well. As we'll see in a moment, that's true of Lovesac. And high-performing companies like this are the kind that long-term investors should consider adding to their portfolios.

That said, Lovesac's past performance doesn't ensure it will continue to be a winner. Indeed, I don't think it presents undeniable upside potential, as we'll see.

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What Lovesac's done right

Lovesac is a furniture company that gets its name from its oversize beanbag chairs. But for 2020, these "sacs" only accounted for 17% of total net sales. By contrast, its sectional couches ("sactionals") account for nearly 81% of net sales, making this Lovesac's most important product. 

Lovesac's sactionals appeal to younger consumers who care about sustainably-sourced products (which should also make this stock appealing to ESG investors). Upholstery is made with yarn produced from recycled plastic bottles. In 2019, the company estimates it used 20 million bottles to manufacture sactionals. In a world where plastic waste is an increasing problem, Lovesac is tackling the challenge in a cool way.

Don't overlook the size and shape of sactionals, either. They're designed to come apart for personalized configuration. And this lets the company ship sactional components in separate standard-size shipping boxes, allowing them to be handled by any major shipping service. Therefore, sactionals are optimized for e-commerce, unlike most things in the furniture business.

A sectional couch in a living room

Image source: Getty Images.

E-commerce optimization is what makes Lovesac special. While it has 107 brick-and-mortar showrooms, the company wants these to support online sales. In fiscal 2020, which ended before the pandemic started, e-commerce was 23.9% of total sales. So when the pandemic hit, Lovesac was already prepared. Through the first three quarters of its fiscal 2021, comparable e-commerce sales were up 247.2% year over year. And e-commerce accounted for 43.5% of total sales in the third quarter, even though showrooms had already reopened. 

Because of these strengths, Lovesac maintained its growth trajectory during the pandemic and has already turned its attention to the future.

The road ahead

Management isn't providing sales guidance. But consensus analyst estimates call for $380 million in full-year fiscal 2022 revenue, according to Yahoo! Finance. For perspective, so far in fiscal 2021, it has $191 million in net sales. Therefore, it has a chance at $300 million in full-year revenue. And growth could continue beyond this year. Some even expect Lovesac will generate $462 million in net sales by fiscal 2024, roughly a 15% compound annual growth rate for the next three years.

Revenue growth is encouraging considering Lovesac is gaining operating leverage. The company had a nearly $7 million loss through the first three quarters of fiscal 2021. But in third quarter, it turned a $2.5 million profit. General and administration expenses are scaling the best. In the third quarter of fiscal 2020, this line item was 47% of sales. In the 2021 third quarter, it was just 35% of sales.

But investors need to remember that, as a retail business, Lovesac's revenue isn't recurring. The company says 35% of all transactions comes from repeat customers, a testament to the quality of its products. But that's hardly recurring revenue. It will constantly need to fight for one-time sales.

That's not necessarily a deal breaker, but it does present a challenge particular to Lovesac. The company's brand isn't top of mind; management says less than 2% of sales are unaided. This means more than 98% need an ad to push the buyer toward a Lovesac purchase. It's possible to see this as a long-term opportunity since the company should get stronger as brand awareness grows. But for now, it's a liability. If the company wants e-commerce and in-store traffic, it will have to spend to drive it.

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Image source: Getty Images.

Is it a buy?

Given its appeal to younger consumers, e-commerce optimization, ongoing revenue growth, and operating leverage potential, I can understand why someone would want to invest in Lovesac stock. And trading at less than three times trailing sales, it's reasonably priced compared to many alternatives on the stock market. If it grows sales like Wall Street thinks it will over the next three years, then this could be a modest market-beating investment.

But I wouldn't bet the farm on Lovesac stock because of its nonrecurring revenue and poor brand recognition; at best, I'd give it a small place in a portfolio. That's because I believe there are stocks offering far greater upside for 2021 and beyond

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.