Lovesac has had an impressive run over the past six months as its shares have beaten the S&P 500 by 18.4%. The stock now trades at $15.29, marking a 31.7% gain. This run-up might have investors contemplating their next move.
Is there a buying opportunity in Lovesac, 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.
Why Do We Think Lovesac Will Underperform?
We’re happy investors have made money, but we're swiping left on Lovesac for now. Here are three reasons there are better opportunities than LOVE and a stock we'd rather own.
1. Long-Term Revenue Growth Disappoints
A company’s long-term performance is an indicator of its overall quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Over the last five years, Lovesac grew its sales at a 16.8% compounded annual growth rate. Although this growth is acceptable on an absolute basis, it fell slightly short of our standards for the consumer discretionary sector, which enjoys a number of secular tailwinds.
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 Lovesac’s cash conversion will fall. Their consensus estimates imply its free cash flow margin of 3.8% for the last 12 months will decrease to 1.2%.
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, Lovesac’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 see the value of companies helping consumers, but in the case of Lovesac, we’re out. With its shares topping the market in recent months, the stock trades at 8.6× forward EV-to-EBITDA (or $15.29 per share). This valuation multiple is fair, but we don’t have much confidence in the company. There are more exciting stocks to buy at the moment. Let us point you toward the most dominant software business in the world.
Stocks We Would Buy Instead of Lovesac
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