Over the past six months, Lovesac has been a great trade, beating the S&P 500 by 21.6%. Its stock price has climbed to $17.60, representing a healthy 35.1% increase. This performance may have investors wondering how to approach the situation.
Is now the time to buy Lovesac, or should you be careful about including it in your portfolio? Get the full stock story straight from our expert analysts, it’s free.
Why Do We Think Lovesac Will Underperform?
We’re glad investors have benefited from the price increase, but we’re cautious about Lovesac. Here are three reasons why there are better opportunities than LOVE, plus one stock we’d rather own.
1. Long-Term Revenue Growth Disappoints
A company’s long-term performance is an indicator of its overall quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Over the last five years, Lovesac grew its sales at a 14.8% annual rate. Although this growth is acceptable on an absolute basis, it fell short of our standards for the consumer discretionary sector, which enjoys a number of secular tailwinds.
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.
Lovesac 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 1.3%, 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, 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
Lovesac doesn’t pass our quality test. With its shares outperforming the market lately, the stock trades at 10.3× forward EV-to-EBITDA (or $17.60 per share). This valuation tells us it’s a bit of a market darling with a lot of good news priced in - you can find more timely opportunities elsewhere. Let us point you toward one of our all-time favorite software stocks.
Stocks We Like More Than Lovesac
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