Morgan Stanley Says Stitch Fix's Stock Could Fall To $25

Stitch Fix Inc SFIX is a mid-tier online apparel retailer stuck in the most competitive market segment and the stock has downside potential of around 30% from Monday's close, according to Morgan Stanley.

The Stitch Fix Analyst: Lauren Schenk initiated coverage of Stitch Fix's stock with an Underweight rating and $25 price target.

The Stitch Fix Thesis: Stitch Fix already has an approximate 6% market share of apparel priced above $29.99 and it may be difficult to grow as there is limited volume done between $29.99 and $100-plus unit pricing, Schenk said. Stitch Fix may also find it hard to gain market share as growth is mostly coming from lower price points and value channels.

Meanwhile, Schenk said management's new initiatives like direct buy, mens, kids and expanding to the UK market could be seen as a sign that the core business is not as "successful as initially hoped." As such, the Street's estimates for 17% compounded annual growth over the next three years may be overly optimistic and the research firm is modeling below consensus CAGR revenue growth of 12%.

Related Link: JPMorgan Likes Tapestry After Chat With Coach Parent Company

Investors still looking for exposure to the online apparel space can find a better opportunity elsewhere

SFIX Price Action: Shares of Stitch Fix were trading lower by 2% Tuesday morning at $35.50.