Investors have warmed to artificial intelligence (AI) stocks in recent months, and the trend has even helped a struggling company like Stitch Fix (SFIX 3.93%). The AI-driven styling and clothing company impressed Wall Street for a time by assisting customers in determining their personal styles with the help of AI and then selling clothing based on that assessment.
However, mounting losses and other challenges took their toll on Stitch Fix over the last two years. And even with a partial recovery, investors should keep three things in mind as the company makes its long-shot attempt at a comeback.
1. The fleeting competitive advantage
Admittedly, with all of the AI-driven hype, it's understandable that investors may turn to Stitch Fix stock. Also, since Stitch Fix incorporates a human element, customers can get the best of both worlds when assessing their style. That gives the company a unique competitive advantage over other clothing retailers.
But then what?
Once customers determine their style preferences, they have little need for Stitch Fix. They can then apply what they've learned to clothing offered by the numerous small and large retailers in the clothing business.
Moreover, even Stitch Fix's styling service is not much of a competitive advantage. Competing services such as Wantable and Stately exist, and Amazon offers a similar service through Amazon Style stores. It uses technology to help determine personal style within a physical store.
Since only two of these stores exist, it doesn't make Amazon much of a competitor, especially since it recently shuttered its personal styling service. But given Amazon's leadership in AI through Amazon Web Services and its massive cash horde, it has the resources to compete as aggressively as it desires in this space.
2. Stitch Fix's lagging financials
Furthermore, the AI-driven hype has done little to stem Stitch Fix's deteriorating financials. In the first nine months of fiscal 2023 (ended April 29), the company reported less than $1.3 billion in revenue, a decrease of 21% versus the same period in fiscal 2022. And though the company reduced expenses during that time, the net loss for the first three quarters of fiscal 2023 came in at $143 million, up from $111 million in the year-ago period.
That loss was not because of the fiscal Q3 performance, as only $22 million of the net loss came in that quarter. But with the company forecasting revenue declines between 22% and 24% for Q4, the lower losses might not be enough of a change to materially improve its financials.
Still, as a consequence of its troubles, Stitch Fix's valuation remains low. Currently, it sells at a price-to-sales (P/S) ratio of just 0.2. But considering its sales multiple peaked at 6 in early 2021, it has never attracted the elevated valuations of many other AI stocks.
NASDAQ: SFIX
Key Data Points
3. Changes in the C-suite
Additionally, Stitch Fix has just hired Matt Baer as its new CEO. Baer previously served as the chief customer and digital officer at Macy's, where he ran the company's digital business.
Baer's experience at Macy's and an earlier stint at Walmart's e-commerce marketplace likely gives him the expertise to run Stitch Fix. Nonetheless, Baer must figure out a way to not only stand out among larger and better-funded competitors but also stem the revenue declines and losses.
He must also restore stability in the company's C-suite. In 2021, founder Katrina Lake stepped down from the CEO position and hired Elizabeth Spaulding, who lasted less than 18 months in the post before Lake stepped back in as interim CEO. Until Baer can prove his leadership and turnaround abilities, investors may be slow to sew this stock into their portfolios.
Avoid Stitch Fix stock
Although Stitch Fix may help change the face of styling, it is unlikely the company will make money from that endeavor. The AI-based styling tools will likely continue to appeal to consumers, but it could take a better-resourced company to profit from selling such a service.
Also, even without the financial challenges, the company has struggled to move beyond its founder's leadership. Until Baer shows an ability to turn this company around, the internet and direct marketing retail stock is unlikely to gain significant traction.
