With the market downturn and economic fears, most Wall Street analysts have turned bearish on their stocks. Therefore, it's rare to find a company with an optimistic price target over the next 12 months, but Raymond James Financial (RJF 1.32%) analyst Rick Patel is certainly hopeful about Figs (FIGS 0.63%). Patel has a price target of $15 on the company, implying 113% upside from today's price.
Is this too outlandish for Figs, despite its consistent performance in 2022, or could this price appreciation be within the realm of possibility for this scrubs manufacturer? Let's find out.
Image source: Getty Images.
Is $15 in the cards?
Wall Street price targets forecast only the next 12 months instead of multiple years. Because of this, the reality that Figs will reach $15 over the next year is unlikely. 113% stock price appreciation in just one year would be far higher than the market's average.
For example, the average S&P 500 annual return from 1928 to 2021 was 11.8%. While stocks can (and often do) outperform the market during any given year, very rarely is it by almost 10 times. That said, while reaching this target over the next year might be unrealistic, the longer the time horizon expands, the more likely Figs could see outsized returns.
What's the long-term opportunity?
Figs could provide mouth-watering returns over the long term, considering its massive potential. The company sells scrubs using a direct-to-consumer approach, which has gained incredible traction: The company has over 2 million active customers and generated almost $464 million in trailing-12-month revenue as of the second quarter, of 2022.
Management believes the scrubs apparel industry in the U.S. alone is worth $12 billion, growing at a compound annual rate of 6.1%. Considering Figs has improved revenue above 20% on a year-over-year basis every quarter since coming public in 2021, it has grabbed market share in this lucrative space.
The company has taken the U.S. scrub industry by storm as one of the only brands to sell directly to consumers. How has this been so successful? It has created a powerful brand name around itself, highlighting product style, comfort, and utility. This has resulted in immense customer satisfaction: Figs had a Net Promoter Score above 80 at the end of 2021, which is considered world-class.
Now, Figs is looking to transplant its healthy brand name overseas. It recently entered seven new countries in Europe, adding to its foreign presence in Canada, Australia, and the U.K. This is a risky endeavor, as transplanting a brand name into other countries isn't always easy. However, if Figs can execute, the opportunity ahead of it could explode higher. Therefore, as it expands its operations internationally and takes more share of the U.S. space, the long-term possibility of Figs shares reaching Patel's price target gets more likely.
You can buy Figs on sale today
Additionally, Figs is trading at a rock-bottom valuation of just 2.8 times sales. Not only is that near its lowest valuation ever as a public company, it's also far lower than other high-quality apparel companies like Lululemon Athletica (LULU 0.80%) and Nike (NKE -0.18%).
That's not to mention Figs' higher gross margin. With a gross profit margin of over 70% in the most recent quarter, Figs has a higher margin than both Lululemon and Nike. This has led to an equally remarkable operating income margin. Figs' trailing-12-month operating margin is nearly 11% -- close to Nike's margin of 13% over the same period.
Why is this so impressive? Figs is a $1.2 billion company, while Nike is (literally) over 100 times larger, so Figs is much more focused on taking market share in the scrubs apparel space than it is on profits. If it can achieve these high profits without focusing on them, what could the company do as it matures and begins to optimize its profits?
Everything seems to be aligning for prospective Figs shareholders. The stock is down significantly, bringing its valuation to an appealing level, and many Wall Street analysts remain very optimistic. That's not to mention the company's steady execution, even during a tumultuous economic environment. Therefore, if you don't already own Figs, today looks like a great entry point.
