For every stock buyer in a transaction, there's a seller who has a much different opinion about the stock. If there was agreement about its chances to beat the market, then it probably wouldn't be up for sale.

This bearish outlook can create an attractive buying opportunity if it is based on the short term and ignores a company's bright, long-term opportunity and current financial strengths.

But sometimes Wall Street has sold off a stock for very good reasons. With that in mind, let's look at why investors might be justified in avoiding Stitch Fix (SFIX -4.15%) right now.

A questionable growth thesis

Stitch Fix is enduring more than just the normal type of growth hangover that has struck many apparel and e-commerce specialists in 2022. That industry slump is contributing to the company's recent record of shrinking sales.

But Stitch Fix created additional challenges, too. The company launched as a personalized styling service, sending pre-selected sets of clothing to its customers. Its more recent pivot toward a direct-buy model confused many prospective subscribers about its value. It has also had trouble communicating that value to existing members in its auto-ship service.

As a result, its active client base is falling, and was down 9% in the most recent quarter. Zoom out a bit, and the picture doesn't improve by much. Its current base of 3.8 million active clients isn't far from the 3.5 million it had by the end of 2020. More losses are likely this year, too, suggesting Stitch Fix might drop below that 2020 level soon, effectively erasing much of the last two years of growth.

Worsening financial metrics

It's harder to have patience about management's turnaround plan in the context of such poor growth. But investors today are also being asked to accept dramatically weakening financial metrics, too.

Stitch Fix is generating big losses, which have ballooned to $207 million in the last six months compared to $8 million a year ago. The company isn't profitable on an adjusted basis, either; the adjusted profit margin amounted to a 1% loss in the most recent fiscal year. The company also didn't demonstrate particularly impressive results before the recent demand pullback. Adjusted margin was just 2% of sales in 2021.

Management has an aggressive cost-cutting plan in the works, but so far investors haven't seen much evidence of how this transformation will support sustainable profits. There's also a big risk around these cuts further hurting its ability to gain new customers or boost engagement from existing buyers.

Watch from a distance

The investing thesis around Stitch Fix isn't broken. The company is seeing more spending per active client as its apparel prices rise. That boost has helped cushion the blow from its declining client base. Cost cuts and the easing of supply chain challenges are sure to help lift earnings in late 2022 and into 2023, too.

But Stitch Fix's industry reach is shrinking, its margins are declining, and its rebound plan still hasn't demonstrated a clear path toward improving results. Investors might choose to overlook some of these problems during a positive selling environment that would give management flexibility to make high-return investments in growth.

Yet the e-commerce apparel industry is likely to see several more quarters of weakness that will amplify Stitch Fix's financial pressures. Given that context, it's no surprise that shares have dropped by over 80% so far in 2022.