What a fantastic six months it’s been for Figs. Shares of the company have skyrocketed 42.2%, hitting $14.58. This was partly thanks to its solid quarterly results, and the run-up might have investors contemplating their next move.

Is now the time to buy Figs, or should you be careful about including it in 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 passing on Figs for now. Here are three reasons we avoid FIGS, plus one 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 3.1 million in the latest quarter, and over the last two years, averaged 6.4% 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. Mediocre Free Cash Flow Margin Limits Reinvestment Potential

Free cash flow isn’t a prominently featured metric in company financials and earnings releases, but we think it’s telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

Figs has shown poor cash profitability relative to peers over the last two years, giving the company fewer opportunities to return capital to shareholders. Its free cash flow margin averaged 10.7%, below what we’d expect for a consumer discretionary business.

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).

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

We cheer for all companies serving everyday consumers, but in the case of Figs, we’ll be cheering from the sidelines. Following the recent surge, the stock trades at 39.9× forward P/E (or $14.58 per share). This valuation tells us a lot of optimism is priced in - we think other companies feature superior fundamentals at the moment. We’d recommend looking at a dominant aerospace business that has perfected its M&A strategy.

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