Why Stitch Fix Stock Soared Today

What happened

Shares of a clothing e-commerce company stitch correction (SFIX 15.47%) soared on Tuesday after the rival company posh mark was acquired for $1.2 billion. As of 12:15 p.m. ET, Stitch Fix stock was up 15%.

So what

Poshmark generated less than $350 million in revenue over the past 12 months, while Stitch Fix generated over $2 billion. However, Poshmark is bought out for $1.2 billion while Stitch Fix’s market cap is only around $500 million – that’s after today’s 15% gain.

Assuming it can get a price/sales (P/S) valuation similar to Poshmark’s in a buyout, Stitch Fix would be worth between $6.5 billion and $7 billion, or 13x to 14x where it is currently trading. Therefore, it appears that investors are interpreting the Poshmark buyout as a signal that Stitch Fix stock is undervalued, which is why it is up today.

Now what

Before getting too enthusiastic, it is important for investors to remember that there is much more to understanding an opportunity than just looking at the P/S ratio. Poshmark has desirable features that Stitch Fix does not: Poshmark increases revenue, while Stitch Fix decreases. Poshmark has a gross margin of over 80% and Stitch Fix is ​​only around 43%. And Poshmark had $581 million in cash and cash equivalents, compared to Stitch Fix’s roughly $213 million in cash, cash equivalents and short-term investments.

This isn’t an apples-to-apples comparison just because Poshmark and Stitch Fix are both e-commerce clothing companies. The two are distinct.

I’m not saying Stitch Fix is ​​a bad company or will be a bad investment from here on out – indeed, it has its own merits too. But I a m saying 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 those of Poshmark. Plus, there’s no way of knowing if an offer would ever come.

If you’re buying Stitch Fix today, it should be because you believe the company can reverse its recent declines. For the outlook, management expects revenue to decline 20% to 22% year-over-year in its next quarter, which shows just how challenging the company is currently facing.

Jon Quast has no position in any of the stocks mentioned. The Motley Fool fills positions and recommends Poshmark, Inc. and Stitch Fix. The Motley Fool has a disclosure policy.

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