If you would invest by just following the market, you'd make out pretty well. That's why many financial experts advise investing at least some of your money in a market-tracking index fund such as the Vanguard S&P 500 Index ETF.
But if you only invest in index funds, you'll be missing out on excellent opportunities to beat the market. Not all high rewards come with high risk. There are great stocks that offer high growth and are surprisingly low-risk. Revolve Group (RVLV 2.24%) is a relatively new stock that has been demonstrating high growth, yet it's trading at a cheap 38 times trailing-12-month earnings, and its stock is trading at a 30% discount to the average Wall Street price target.
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A new way to deliver fashion
Revolve operates an artificial intelligence (AI) powered fashion website targeting millennials and Gen Z consumers. It offers a huge selection of top designer products, and it speaks to its customers in their language, working with name-brand influencers whom its shoppers follow and value.
The company has been posting high growth since it went public in 2019. Most recently, in the 2021 fourth quarter, revenue growth accelerated 70% year over year to $240 million and 54% year over year for the full year.
It's also profitable, which isn't a given for a high-growth stock. Net income increased 55% year over year to more than $29 million. Active customers increased 25% in the fourth quarter over 2020 to 1.8 million, and these customers are engaged -- total orders placed highly exceeded that increase, growing 72% over last year. Average order value increased 14%.
This is a dynamic company with a unique approach to clothing sales, posting explosive growth at the same time that many traditional clothing retailers are struggling. Huge department store names like Macy's and Nordstrom have been trying all sorts of strategies to boost flagging sales, and mall standards such as Gap have also seen their popularity decrease.
Revolve's tech focus is an important element in its growth since its powerful AI model gives it quick and accurate data to target each customer with the right product mix and give it the information it needs to know what's in style and what's out. Another component that makes it stand out is its brand ambassador program, which recruits "micro" ambassadors to spread the word through social media and has had more than 10,000 recruits.
A huge market opportunity
Revolve is still in its infancy, with less than $1 billion in 2021 sales. But it has a huge opportunity as trends are shifting away from traditional shopping and toward the model that Revolve operates so well. CEO Mike Karanikolas said, "We believe our ability to achieve such outstanding results during a challenging operating environment underscores our sustainable competitive advantages."
Supply chain disruptions came to Revolve, including its highest-ever air freight costs, but it managed through the fourth quarter with record profitability and Net Promoter Scores.
Karanikolas believes that challenging times provide great opportunities for companies that operate well. Indeed, it may be that it was able to capture market share over the past few months from companies that aren't as well oiled as Revolve. It will focus on customer acquisition and retention and thoughtful ways to improve its technology.
One specific goal is to fine-tune its FRWD brand, its private-label business. This has been exceptionally successful, growing 83% year over year in 2021. Some other goals to watch are the expansion into new categories and international growth. International has been taking a back seat to U.S. sales, accounting for 17% of the total in the fourth quarter of 2021, down from 19% in the third quarter, and it has been decreasing as a part of the whole.
A stock with lots of potential
Shopping continues to shift online, and Revolve is well placed to benefit from the transition. The stock price has been down 10% this year, and it fell even more after the earnings report came out last week. Investors weren't pleased with the 2022 guidance, which calls for a stark deceleration as sales rebounded strongly last year after the initial stages of the pandemic.
Analysts expect first-quarter sales to increase about 42%, and 23% for the full year. That's not unexpected coming off such a great year, and it beat analyst expectations for the past two years.
Revolve has a long runway toward growth, and at this price, it looks likes a great time to buy shares.
