What a time it’s been for Figs. In the past six months alone, the company’s stock price has increased by a massive 45.6%, reaching $6.71 per share. This was partly due to its solid quarterly results, and the run-up might have investors contemplating their next move.

Is there a buying opportunity in Figs, or does it present a risk to your portfolio? Get the full breakdown from our expert analysts, it’s free.

Why Do We Think Figs Will Underperform?

We’re glad investors have benefited from the price increase, but we're cautious about Figs. 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 2.74 million in the latest quarter, and over the last two years, averaged 7.8% 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. Cash Flow Margin Set to Decline

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 predict Figs’s cash conversion will fall. Their consensus estimates imply its free cash flow margin of 7% for the last 12 months will decrease to 2.1%.

3. New Investments Fail to Bear Fruit as ROIC Declines

ROIC, or return on invested capital, is a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Unfortunately, Figs’s ROIC has decreased significantly over the last few years. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.

Final Judgment

Figs doesn’t pass our quality test. Following the recent surge, the stock trades at 119.3× forward P/E (or $6.71 per share). This valuation tells us a lot of optimism is priced in - we think there are better opportunities elsewhere. We’d suggest looking at a dominant Aerospace business that has perfected its M&A strategy.

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