Up 1,800% in 5 Years, Is This Furniture Stock a Buy?

RH (RH -1.99%), more commonly known as Restoration Hardware, has been an outstanding performer in recent years. What's more, the company has big ambitions that could take its business to the next level. In this Fool Live video clip, recorded on Dec. 13, Fool.com contributors Matt Frankel and Jason Hall discuss the company's plans and whether they think the stock will be a big outperformer over the next several years. 

Matt Frankel: RH, if you're not familiar, they are a high-end furniture company, a luxury furniture brand. Just to run through some of their statistics, they've actually grown quite well over the past year. Revenue grew 20% in the most recent quarter year over year. Their margins are surprisingly high for a furniture company, about 28% adjusted operating margin, which is pretty impressive for a furniture brand.

The stock has performed extremely well, which as more growth guys, I'm surprised you ranked that lower because RH has delivered an 1,800% return over the past five years. They see a pretty big opportunity. They're trailing-12-month revenue is in the $3 billion ballpark. They see an opportunity to get it to $25 billion over time.

They have a pretty ambitious 2020 plan, 2022 rather. They are introducing RH Contemporary, a new line that they call their most significant product launch ever. They are expanding internationally. They're opening a gallery in London, RH England they're calling it. They're opening a hotel in New York, the RH Guest House. I saw Danny made a face, and so did I when I read it, to be fair. But if you've ever been to an RH store, it looks like a place I'd like to stay. It's not that far off from their core business as you might expect, but it's one of the reasons I ranked it No. 10 [out of 10 "holiday shopping" stocks].

There is a lot of things going on. Their eventual goal is to have a design gallery in every major market around the world. That's where their $25 billion opportunity comes from. And for me, I ranked this nine out of 10, I believe. For me, I ranked it low because it sounds like they're trying to do too much. I think they are venturing away from their core competency a little too much. The hotel thing, I made the same exact face Danny just did, I wish everyone could have seen it. But we both made faces when we saw that they are opening a hotel.

The $25 billion target seems like a lot would have to go right to get to that point. It's not a cheap stock. Like I mentioned, it's up 1,800% in the last five years. So I'm questioning how they're going to take it to the next level for shareholders. I think it's the most binary of any of these stocks in terms of the most to lose if things start going wrong. But that's just me. Guys, what do you think about this?

Jason Hall: I'll jump in real quick here, and I can tell you, I love the business, I absolutely love it, and I'm going to tell you why to a certain extent it's earned being such a market outperformer. This is a retailer that's getting 24% operating margins, and gross margins are knocking on 50%. That's incredible. I own some of their furniture, and it's great furniture. It really is high quality, it's beautiful. I can get into arguments about whether it's overpriced or not, because just like so many luxury items, it's worth what people are willing to pay for it.

Here's the reason I rated this No. 10. Despite those things, it's trading for five times sales. The bottom line is this is not a SaaS [software-as-a-service] company. This isn't a company that's going to get 85% operating margins. It's never going to be that business, and I think five times sales is insane. The bar is so high for the kind of performance this company will need to generate to earn that.