The S&P 500 and Nasdaq Composite indexes dropped double-digit percentages in 2022, and Figs (FIGS 0.21%) wasn't spared. The maker of scrubs for medical professionals saw its stock slide 78% last year, thanks to business struggles and generally risk-averse investor sentiment in a higher-interest rate environment.
But the small-cap stock is up 23% so far this year. Does this foreshadow a further recovery in 2023? Might Figs shares reach $20 this year -- more than double its current price? Let's take a closer look.
A dramatic slowdown
After posting annual revenue growth of 138.1% in 2020 and 59.5% in 2021, Figs experienced a sharp slowdown in 2022, like many other companies. In the most recent quarter (ended Sept. 30), sales and active customers increased 25.2% and 23.6%, respectively, year over year -- not what investors have been accustomed to seeing.
Management highlighted two key factors for the company losing its momentum. Inflation is pinching Figs' customer base's wallets and they are tightening their spending. Additionally, new color launches didn't sell as expected. Adding fuel to the fire is Figs' inventory balance, which nearly doubled between the end of 2021 and Sept. 30, 2022. We've seen similar situations at leading apparel businesses like Nike and Lululemon. The risk here is greater product obsolescence and more promotional activity.
But Figs does deserve some credit for its overall business. The company has developed a recognizable brand in the fragmented healthcare clothing industry. And its products are certainly resonating with consumers thanks to their functional, stylish, and comfortable attributes. What's really impressive is Figs' gross margin, which has hovered around 70% in recent quarters. This stellar metric is made possible by building a direct-to-consumer model that leans heavily on Figs' digital capabilities.
Don't bet on it
At $20 per share, Figs stock would need to climb more than 120% based on its closing price of $9.05 as of Feb. 22. Barring a complete reversal of monetary policy by the Federal Reserve and a resulting speculative mania from investors that could push up shares, I don't think this is a likely scenario.
The only thing that can perhaps boost the stock is strong fundamental performance that surprises to the upside, but even these prospects are muted in the near term. For the full year of 2022, management downgraded guidance and is now calling for revenue to rise 18% to $495 million. Moreover, Wall Street consensus analyst estimates predict that sales will rise 13.3% in 2023 on a year-over-year basis.
For what has been known as a growth stock, this potential top-line gain isn't enough to push shares to $20, in my opinion. To be fair, Figs was last at $20 in April 2022, so this wouldn't exactly be uncharted territory. But with Fed tightening pushing investors to temper their expectations and focus less on outsized growth in favor of profitability once again, the optimism surrounding Figs might be under pressure, especially if the U.S. enters a recession sometime this year.
While it's virtually impossible to predict what a stock will do in the next year, shareholders do have some added upside now that Figs stock is down 82% off its all-time high. And as of Feb. 22, the stock trades at a price-to-sales multiple of just 3.3, which is nearly the cheapest the shares have sold since the business had its initial public offering in May 2021. It's hard to argue with just how beaten-down this stock has become. This alone doesn't mean that it's due to reverse course and skyrocket in short order, though.
I have no clue where Figs share price will trend throughout 2023. But to be clear, expecting any stock to rise 120% in such a short period of time is likely a recipe for disappointment. It's better to have more realistic expectations. However, if you still believe in the long-term prospects of Figs despite the ongoing challenges that it faces, then now might be as good a time as ever to buy its stock.
