Stitch Fix’s sharp decline signals high growth hurdles for tech-enabled startups

Hello and welcome back to our regular morning look at private companies, public markets and the gray space in between.

Shares of Stitch Fix, a digitally-enabled “styling service,” are off sharply this morning after its earnings failed to excite public market investors. The firm, worth over $29 per share as recently as February, opened today worth just $14.75 per share. Stitch Fix equity shed nearly 7% of its value yesterday in the broad market selloff. Today it’s off another 30.48%.
The company is profitable and growing, making its declines seemingly out of the norm for a somewhat recent venture-backed IPO. Stitch Fix raised more than $79 million during its life as a private company from investors like Baseline Ventures, Lightspeed Venture Partners, and Bessemer, according to Crunchbase data
Stitch Fix, which went public in 2017, is a good example of a tech-enabled business. Its margins are slimmer than what we see from technology-first companies like software shops. It uses modern tech methods like data science to help power its consumer recommendations, boosting the value it offers its users, and growing its share of spend. But the company ultimately sells third-party physical goods intermediated by human choices. So it’s a business that may have attractive economics, but it won’t trade near software as a service (SaaS) multiples, as we’ll see.
We’ve recently covered the public market’s evolving views on the value of tech-enabled companies in contrast to pure-tech valuations; it’s a topic that matters as there are startups in the market today likely valued more like the latter whose economics are more like the former. We know that as Casper ran into that exact situation while going public earlier this year.
Let’s unpack Stitch Fix’s quarterly performance, its forecast, and how those figures failed to meet market expectations. We’ll tease out where things went wrong, and then consider the firm’s results in light of what’s happened to other tech-enabled businesses this year to see if there’s a lesson for startups whose gross margins are under 50%.
Source: TechCrunch