I took a quick look at Stitch Fix. If the long term model on the slideshow Karen linked to is to be believed, roughly 10% gross margin on a roughly $1.7b run rate would be something like 170m in annual profit. A PE ratio of 25 would mean SFIX should be worth $4 billion, rather than $2 billion where it sits today. And with the rate they’re growing, you could even see a higher PE.
Conversely, a 5% net margin and a PE of 10 would make them a $850 million company.
Obviously there’s a lot of upside, but I think the market is pricing in that risk. Achieving a 10% net margin doesn’t seem outlandish, but it’s not a given. I’d imagine even if they achieve it, there’s some risk of margin erosion over time. People don’t want to pay more than they used to…but payroll and inventory etc…those costs aren’t fixed. So even as they scale, maintaining a nice gross margin won’t be easy. My guess is, that will keep the PE ratio down.
In the short term, the market doubts their margins, so what if the market’s right? What if they come out with 40% growth this quarter, but only 1 or 2 cents EPS instead of the 4 or 5 expected. How would the market react?
Switching back to the long term, what if SFIX flounders to ever become profitable? I don’t think it’s likely, but they’re not a software company, and so margins are not a given. I’m pretty sure their gross margin is actually very good for the industry…which leads to questions about whether it’s sustainable. I know it’s growing now, but how/why it’s so high is worth exploring.
I think I can see both sides here. Schrodinger’s cat is still in the box. With a solid quarter, it’s possible the market could see that they’re growing nicely, doing what they say they’ll do, and the shares could get a good bump up. Or the market might not favor them until they actually show the profit – whenever that is. If I had to guess, I think it’s the latter. I don’t think the market will suddenly send the stock soaring just because they show slightly better revenue growth.
But, if they beat on revenue AND beat big on EPS, I could certainly see a big bump up when they report.
So thanks Wouter for bringing this. I liked it enough to make an options bet. But in the end, I see it as a bet, rather than a company that’s a screaming buy.
Bear