Figs’s stock price has taken a beating over the past six months, shedding 28.9% of its value and falling to $4.86 per share. This 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? Check out our in-depth research report to see what our analysts have to say, it’s free.

Even though the stock has become cheaper, we're sitting this one out for now. Here are three reasons why you should be careful with FIGS and a stock we'd rather own.

Why Is Figs Not Exciting?

Rising to fame via TikTok and founded in 2013 by Heather Hasson and Trina Spear, Figs (NYSE:FIGS) is a healthcare apparel company known for its stylish approach to medical attire and uniforms.

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 2.67 million in the latest quarter, and over the last two years, averaged 12.1% year-on-year growth. This performance slightly lagged the sector and suggests it might have to lower prices or invest in product improvements to accelerate growth, factors that can hinder near-term profitability.

2. Revenue Projections Show Stormy Skies Ahead

Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.

Over the next 12 months, sell-side analysts expect Figs’s revenue to drop by 1.8%, a decrease from its 4.8% annualized growth for the past two years. This projection is underwhelming and implies its products and services will see some demand headwinds.

3. Previous Growth Initiatives Have Lost Money

Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).

Figs’s five-year average ROIC was negative 1.8%, meaning management lost money while trying to expand the business. Its returns were among the worst in the consumer discretionary sector.

Final Judgment

Figs’s business quality ultimately falls short of our standards. After the recent drawdown, the stock trades at 55.9× forward price-to-earnings (or $4.86 per share). At this valuation, there’s a lot of good news priced in - we think there are better opportunities elsewhere. Let us point you toward a fast-growing restaurant franchise with an A+ ranch dressing sauce.

Stocks We Would Buy Instead of Figs

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