What happened
Shares of Revolve Group (RVLV 2.71%) were down 23.5% as of 11:40 a.m. ET on Wednesday after the company reported results for the first quarter on Tuesday. The company reported sales growth of 58% year over year, driven by a 38% increase in active customers on a trailing-12-month basis.
So what
Sometimes the market punishes stocks for reasons that don't make sense, and this seems to be one of those days. Valuation could have played a role. The stock had been trading around a price-to-earnings (P/E) ratio of 40 based on forward analyst estimates earlier this year. Still, that is not too expensive for a company posting this level of sales growth.
What's more, Revolve's profitability is holding up despite supply chain and inflationary pressures. While net income increased only 1% year over year, that was mainly due to a higher tax rate. Pre-tax income increased by 38% year over year, with free cash flow up 62%.
Image source: Getty Images.
Now what
Could forward guidance have anything to do with the market's negative response? Again, this was positive. Sales were growing 30% year over year at the start of the second quarter in April. Perhaps the market is looking at that deceleration, but management expects the second quarter to be its biggest sales quarter of the year as travel picks up over the summer.
"We believe our business momentum and market share gains illustrate that our brands are truly resonating with next generation consumers globally across both the Revolve and FWRD segments, highlighted by strong customer engagement and record growth in active customers for the third consecutive quarter," the company said in the earnings release.
With the stock now trading at a much cheaper forward P/E of 26, the post-earnings drop looks like a good buying opportunity.
