What happened
Shares of clothing e-commerce company Stitch Fix (SFIX -2.28%) soared on Tuesday after rival company Poshmark was acquired for $1.2 billion. As of 12:15 p.m. ET, Stitch Fix stock was up 15%.
So what
Poshmark has generated less than $350 million in trailing-12-month revenue, whereas Stitch Fix has generated over $2 billion. However, Poshmark is getting bought out for $1.2 billion while the market capitalization of Stitch Fix is only around $500 million -- that's after today's 15% gain.
Supposing it could fetch a similar price-to-sales (P/S) valuation to Poshmark in a buyout, Stitch Fix would be worth somewhere between $6.5 billion and $7 billion -- 13 times to 14 times where it trades now. Therefore, it appears that investors are interpreting Poshmark's buyout as a signal that Stitch Fix stock is undervalued, which is why it's up today.
Now what
Before getting too excited, it's paramount for investors to remember that there's a lot more to understanding an opportunity than just looking at the P/S ratio. Poshmark has some desirous traits that Stitch Fix doesn't: Poshmark is growing revenue, whereas Stitch Fix is declining. Poshmark has a gross margin over 80% and Stitch Fix's is only around 43%. And Poshmark had $581 million in cash and equivalents compared to around $213 million for Stitch Fix in cash, cash equivalents, and short-term investments.
It's not an apples-to-apples comparison simply because Poshmark and Stitch Fix are both e-commerce apparel companies. The two are distinct.
I'm not saying that Stitch Fix is a bad company or will be a bad investment from here -- indeed, it has its own merits, too. But I am saying that I wouldn't buy Stitch Fix stock today, hoping it becomes an acquisition target with a substantial buyout premium. Stitch Fix would be valued on its own business fundamentals -- not Poshmark's. Moreover, there's no way to know if an offer would ever come.
If you buy Stitch Fix today, it should be because you believe the company can reverse its recent declines. For perspective, management is guiding for a 20% to 22% year-over-year drop in revenue in its upcoming quarter, which shows how challenged the business is presently.
