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FIGS (NYSE:Planetsuzy lucie cline) has gone public and I am attracted to the strong and good story behind the company. The direct-to-consumer (DTC) apparel platform for the healthcare sector has seen incredible performance, as literally all the boxes are ticked in this offering, if not for the fact that other investors have recognized this as well.

After investors have aggressively bid up the share price since the offering, I am a bit cautious, only on the back of the valuation argument as the business is absolutely on fire.

The title of this paragraph is the mission of FIGS which has grown to become the largest healthcare apparel DTC platform. The company has a huge net promoter score of 81 and serves some 1.5 million customers.

The company celebrates, empowers and serves healthcare professionals with comfortable, durable, functional and stylish workwear at affordable prices. It has seen an explosion in its business in recent years, having grown from a mere $17 million in sales in 2017 to a $263 million revenue number last year, indicating spectacular growth. Moreover, almost but all sales are generated through the own DTC platform.

Convenience offered to customers is ever more important as healthcare professionals are strained in terms of time and resources, and that has been the case even before the impact of Covid-19. Furthermore, attraction to purpose-driven brands and better and more comfortable apparel made that the business has seen great traction in recent times. Clothes are made with a purpose for this industry including specific features such as stretch, anti-odor, anti-wrinkle, and moisture-wicking apparel.

The company, started in 2013, is led by the two co-founders who have built it up together as well. Following an initial stage of building the business, commercial traction has been very strong over the past years.

Management and underwriters aimed to sell a combined 22.5 million shares in a range between $16 and $19 per share, with final Ivana vladislava instagram set at $22 per share. Selling shareholders sold the vast majority, some 16.6 million shares, as the company itself sold 5.9 million shares. The gross proceeds benefiting the company come in around $130 million.

With a total of 161.4 million shares outstanding, the company has been awarded a $3.55 billion equity valuation. If we factor in a net cash position of around $150 million, the enterprise valuation of the firm comes in around $3.4 billion.

The company has seen spectacular growth in recent years, accompanied by real operating leverage. Revenues rose 102% to $110 million in 2019 as an operating loss of $13 million in 2018 turned into a break-even result that year. Revenues more than doubled again, and in fact rose 138% to $263 million last year, undoubtedly driven by a positive Covid-19 impact. Operating profits have seen phenomenal operating leverage, having jumped to $58 million, for very fat margins of 22%. At these margins, the question can be asked if the company should not lower prices to really help its customer base.

Based on the 2020 performance, the company trades at 13 times reported revenues that year and 58 times operating earnings, resulting in a sky-high multiple. Moreover, operating momentum has been continuously very strong. Revenues for the first quarter of this year rose 170% to $87 million, for a $350 million run rate already, which results in a compressed revenue multiple of 10 times. Operating profits quadrupled to $16 million as an annualized number works down to $64 million, or 53 times operating earnings multiple.

These are no cheap multiples, but the rapid pace of growth is clearly very impressive as there is much to like about the company. However, investors have been aggressively pricing in the future anticipated benefits as shares have risen to $34 at the moment. This move has added nearly $2 billion to the enterprise value versus the offer price, boosting the operating asset valuation to $5.4 billion. If we compare this valuation to the current annualized numbers, we see a valuation at 15 times annualized sales and more than 80 times operating earnings!

Do not get me wrong, this business is a real winner and ticks pretty much all the boxes out there. The flip side and risk are obviously related to the (high) valuation. Given the rapid growth of the business, there are some operational risks as well relating to reliance on key staff, a single distribution center, and reliance on sourcing from China, among others.

Competition is another key risk, yet the DTC model, the loyalty by all stakeholders, and the potential are certainly there. Growth is so strong as it feels almost a hype, yet on the other hand the testimonials are good.

I have been quite astonished by the demand and I like the business a great deal. That being said, it feels as if the current momentum has been pulled forward perhaps a bit too much at 15 times annualized sales, although operating momentum is undeniably very strong. On the other hand, the potential market and traction are so good that I do not rule out that further gains could be seen by long-term holders from current levels, yet I see no compelling risk-reward to buy the shares now.

Nonetheless, the momentum is interesting enough to keep a close eye on the shares from here, certainly if growth can continue and shares perhaps might see a dip down the road.

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