Figs has been treading water for the past six months, recording a small loss of 1.3% while holding steady at $5.47. The stock also fell short of the S&P 500’s 12.4% gain during that period.
Is there a buying opportunity in Figs, or does it present a risk to your portfolio? Get the full stock story straight from our expert analysts, it’s free.We're cautious about Figs. Here are three reasons why there are better opportunities than FIGS and a stock we'd rather own.
Why Do We Think Figs Will Underperform?
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 14.6% 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. EPS Trending Down
We track the long-term change in earnings per share (EPS) because it highlights whether a company’s growth is profitable.
Sadly for Figs, its EPS declined by 7.8% annually over the last five years while its revenue grew by 37.3%. This tells us the company became less profitable on a per-share basis as it expanded.
3. Previous Growth Initiatives Haven’t Paid Off Yet
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 historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 1.9%, lower than the typical cost of capital (how much it costs to raise money) for consumer discretionary companies.
Final Judgment
Figs falls short of our quality standards. With its shares trailing the market in recent months, the stock trades at 48.4× forward price-to-earnings (or $5.47 per share). This valuation tells us a lot of optimism is priced in - you can find better investment opportunities elsewhere. We’d suggest looking at Wabtec, a leading provider of locomotive services benefiting from an upgrade cycle.
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