Shares of Crocs (CROX 2.75%), the maker of the colorful plastic clogs that are as noticeable as they are ubiquitous, are down 70% from their 52-week high despite the popularity of its namesake shoes. Its shares have been hit by the same supply-chain and inflation concerns that have hammered many of the market's fastest-growing stocks.
But at this point, the stock looks oversold, and Crocs is becoming the ultimate hybrid of growth and value. Let's see why.
Crocs are everywhere
First, some anecdotal background. I've always enjoyed Crocs and have owned a few pairs, but I never realized how popular they were until I became a parent and saw how much kids love them. You don't realize just how big they are until you have growing children and reorder as they quickly outgrow their current pair. While trying to reorder new ones last summer, I had trouble finding anything in the right size that wasn't sold out.
You can make the case that this was a missed opportunity for sales, but I look at it as rampant demand. Backing up this admittedly anecdotal evidence, investment bank Piper Sandler's Taking Stock with Teens survey finds that Crocs is the sixth-most-popular footwear brand with the Gen Z demographic, up from eighth the previous year.
Some may think of Crocs as just comfortable footwear that people wear at home, but there is more to it. They have become popular with workers who are on their feet all day, like restaurant staff and nurses. Crocs even makes special versions of its products for these workers.
Crocs has displayed an amazing amount of creativity and willingness to collaborate with all kinds of other brands and celebrities to create higher-end, fashionable models. For example, it has collaborated with high-end Paris fashion house Balenciaga and with up-and-coming streetwear designer Anwar Carrots on signature launches. Celebrities like Justin Bieber, Post Malone, and Bad Bunny -- three of the most popular recording artists in the world -- have all teamed up with the company to launch their own Crocs.
These strategies are working as the company grew revenue by an astonishing 44% year over year in the most recent quarter. What really stands out about this increase is that it is lapping 2021, a time period when many people perceived Crocs as a beneficiary of work-from-home trends. So it is encouraging to see that it has picked up even more momentum since then.
Despite the gauntlet of macroeconomic challenges companies are facing, Crocs management feels so confident about what they are seeing that they were able to raise their forecast for revenue, margins, and earnings for the rest of 2022. Management's goal is to grow the nameplate Crocs brand to $5 billion in revenue by 2026, which would be nearly one-and-a-half times the stock's current market cap.
The company's standard adult clog is currently the third-best-selling product on Amazon for the entire category of clothing, footwear, and jewelry -- and the children's clog is ranked fifth. In the men's loafers and slip-ons category, the recent Crocs acquisition Hey Dude not only takes the No. 1 spot with the best-selling model but also takes second, third, fourth, and fifth, holding down all five of the top five spots in an impressive tour de force.
Crocs is cheap
Despite this growth and its foothold with young consumers, shares of Crocs are trading at unbelievably cheap prices. Crocs is valued at just five times earnings and an even cheaper 4.7 times next year's earnings. The company is growing fast and has a price-to-earnings-growth (PEG) ratio of just 0.5. PEG seeks to balance the playing field between growth and value and divides a company's price-to-earnings multiple by its earnings growth rate. A PEG ratio below 1 is typically considered to be undervalued, so a PEG ratio of 0.5 stands out.
Crocs presents the rare opportunity to purchase a stock that is profitable and growing revenue at an enviable clip at a rock-bottom valuation, and therefore, shares of Crocs look like a strong buy.