What a time it’s been for Figs. In the past six months alone, the company’s stock price has increased by a massive 122%, reaching $16.21 per share. This was partly thanks to its solid quarterly results, and the performance may have investors wondering how to approach the situation.
Is there a buying opportunity in Figs, or does it present a risk to your portfolio? See what our analysts have to say in our full research report, it’s free.
Why Do We Think Figs Will Underperform?
We’re glad investors have benefited from the price increase, but we're swiping left on Figs for now. Here are three reasons why FIGS doesn't excite us and a stock we'd rather own.
1. Weak Growth in Active Customers Points to Soft Demand
Revenue growth can be broken down into changes in price and volume (for companies like Figs, our preferred volume metric is active customers). While both are important, the latter is the most critical to analyze because prices have a ceiling.
Figs’s active customers came in at 2.92 million in the latest quarter, and over the last two years, averaged 5% year-on-year growth. This performance was underwhelming and suggests it might have to lower prices or invest in product improvements to accelerate growth, factors that can hinder near-term profitability. 
2. EPS Trending Down
Analyzing the long-term change in earnings per share (EPS) shows whether a company's incremental sales were profitable – for example, revenue could be inflated through excessive spending on advertising and promotions.
Figs’s full-year EPS dropped 15.2%, or 3.6% annually, over the last four years. We tend to steer our readers away from companies with falling revenue and EPS, where diminishing earnings could imply changing secular trends and preferences. Consumer Discretionary companies are particularly exposed to this, and if the tide turns unexpectedly, Figs’s low margin of safety could leave its stock price susceptible to large downswings.
3. Free Cash Flow Projections Disappoint
If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.
Over the next year, analysts’ consensus estimates show they’re expecting Figs’s free cash flow margin of 8.4% for the last 12 months to remain the same.
Final Judgment
Figs doesn’t pass our quality test. Following the recent surge, the stock trades at 60.7× forward P/E (or $16.21 per share). This valuation tells us a lot of optimism is priced in - we think there are better stocks to buy right now. Let us point you toward a dominant Aerospace business that has perfected its M&A strategy.
Stocks We Would Buy Instead of Figs
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