Stitch Fix, Inc.'s (NASDAQ:SFIX) Share Price Not Quite Adding Up

There wouldn't be many who think Stitch Fix, Inc.'s (NASDAQ:SFIX) price-to-sales (or "P/S") ratio of 0.2x is worth a mention when the median P/S for the Specialty Retail industry in the United States is similar at about 0.4x. Although, it's not wise to simply ignore the P/S without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

See our latest analysis for Stitch Fix

What Does Stitch Fix's Recent Performance Look Like?

Stitch Fix could be doing better as its revenue has been going backwards lately while most other companies have been seeing positive revenue growth. One possibility is that the P/S ratio is moderate because investors think this poor revenue performance will turn around. However, if this isn't the case, investors might get caught out paying too much for the stock.

Keen to find out how analysts think Stitch Fix's future stacks up against the industry? In that case, our free report is a great place to start.

How Is Stitch Fix's Revenue Growth Trending?

In order to justify its P/S ratio, Stitch Fix would need to produce growth that's similar to the industry.

Retrospectively, the last year delivered a frustrating 18% decrease to the company's top line. This means it has also seen a slide in revenue over the longer-term as revenue is down 18% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

Looking ahead now, revenue is anticipated to climb by 0.5% each year during the coming three years according to the ten analysts following the company. Meanwhile, the rest of the industry is forecast to expand by 5.7% per annum, which is noticeably more attractive.

With this information, we find it interesting that Stitch Fix is trading at a fairly similar P/S compared to the industry. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. Maintaining these prices will be difficult to achieve as this level of revenue growth is likely to weigh down the shares eventually.

The Key Takeaway

Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

Given that Stitch Fix's revenue growth projections are relatively subdued in comparison to the wider industry, it comes as a surprise to see it trading at its current P/S ratio. At present, we aren't confident in the P/S as the predicted future revenues aren't likely to support a more positive sentiment for long. Circumstances like this present a risk to current and prospective investors who may see share prices fall if the low revenue growth impacts the sentiment.

It is also worth noting that we have found 3 warning signs for Stitch Fix that you need to take into consideration.

If these risks are making you reconsider your opinion on Stitch Fix, explore our interactive list of high quality stocks to get an idea of what else is out there.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.