It's been a wild ride for Stitch Fix (SFIX -2.55%) investors over the last six months. After soaring to a high of $113.76 in January, the stock fell sharply following the fiscal second-quarter earnings report in early March. The sell-off can be attributed to management's lower-than-expected outlook for revenue growth in the near term.

Still, Stitch Fix has tremendous advantages in the massive global apparel market with its data-centric approach to delivering a personalized styling service for its 3.9 million active clients. 

The company is scheduled to report fiscal third-quarter earnings results on June 7, after the market closes. To better understand whether you should buy, sell, or hold the stock, let's review the company's recent performance and updated guidance for fiscal 2021.

Two mobile phone screens displaying clothing selections from Stitch Fix.

Clothing selections from Stitch Fix. Image source: Stitch Fix.

Moving in the right direction

Last quarter, Stitch Fix reported its highest revenue growth since the pandemic started. Revenue grew 12% year over year in the fiscal second quarter, and that performance was despite severe shipping delays during the holiday quarter due to the wave of online shopping. Management sees further revenue acceleration through the rest of the year, with that number expected to be up 18% to 20% in fiscal 2021. 

Another important metric to watch is active client growth, which has been steadily improving. Over the last three quarters, active client growth on a year-over-year basis has improved from 9% in the 2020 fourth quarter to 12% in the most recent quarter. 

Some investors hit the sell button due to the weaker outlook. Management had previously forecast 20% to 25% revenue growth in fiscal 2021. The downward revision to guidance reflects continued carrier issues in shipping items to customers. Keep in mind that Stitch Fix earns revenue only when customers tell the company what items they are keeping and return the unwanted ones. The lower guidance also reflects management's decision to delay the rollout of direct buy to first-time clients until later this fiscal year. 

It's possible some investors might have been looking for a good excuse to sell their shares after the stock price more than doubled in 2020. But long-term investors should have been encouraged from this statement during the fiscal second-quarter earnings call by CEO Katrina Lake: "[W]e are continuing to see clients migrating to our offering at the highest rates we've seen in years, and we're excited about the opportunity to accelerate our [market] share gains over time." 

SFIX Chart
Data by YCharts.

Is the stock a buy?

For what it's worth, analysts are looking for revenue to come in at $510.5 million for the fiscal third quarter. Adjusted earnings per share are expected to be a loss of $0.27, compared to the year-ago loss of $0.33. 

Of course, we don't want to make a long-term investment decision based on the performance of one quarter. Investors need to think about the big picture of what Stitch Fix is trying to accomplish before deciding to buy shares.

Stitch Fix is essentially a tech company with just $1.75 billion in revenue operating in the massive apparel industry, which is valued at hundreds of billions in annual spending.  

Looking underneath the addressable market, I believe the current CEO transition could be a midterm catalyst that investors are overlooking.

The company recently announced that Lake is stepping down to transition to the role of executive chairperson. Company president Elizabeth Spaulding, who previously worked at Bain for more than 20 years, will step in as the new CEO on Aug. 1.  

Spaulding has extensive experience leading digital transformations for companies across the consumer and tech sectors. That experience will pay dividends as Stitch Fix launches new features, such as Fix Preview and direct buy, and continues to invest to extend its lead in personalized shopping. 

Still, the recent volatility shows how unpredictable the market can be in the near term, especially when we don't know what surprises might be in store in the upcoming earnings report. But at a relatively small market cap of $6.1 billion, I believe there is tremendous room for this stock to climb over the long term. Investors have to decide for themselves whether Stitch Fix is right for their investment goals, but I'm personally holding my shares with no plans to sell anytime soon.