When making investment decisions, it can be tough to go against the grain. If everyone is selling a stock, you might think: Why should I buy it? But if you're going to dabble in individual stocks, sometimes you have to zig when others zag and pick up shares of beaten-down stocks because your conviction in their potential holds strong. 

Revolve Group (RVLV 0.12%) is one such stock that has gotten little love in 2022. The online fashion retailer, which focuses on serving millennial and Gen Z shoppers, is down 52% this year, making it one of the worst-performing retail stocks out there. Let's take a look to see if this sell-off has been warranted or if the stock looks like a bargain right now.

A person unpacks clothing from an online retailer.

Image Source: Getty Images

First-quarter results

Revolve Group owns two online fashion websites: its flagship Revolve store and its designer brand store called Forward, or FWRD. In Q1, both segments posted positive results, with Revolve posting higher sales and FWRD demonstrating stronger growth. Revolve's segment net sales were $237.7 million, up 56% year over year, and FWRD's was $45.8 million, up 71% year over year. FWRD's net sales have more than tripled in the past three years under Revolve's umbrella as the company tries to push its core customers over to the high-end fashion website. Management said that overlap continues to grow between the two websites but that it is only at 5% of its total customer base, indicating that there is still a long way to go in growing FWRD customers. 

On a consolidated basis, Revolve Group has grown its revenue by 62% in the last 12 months to just under $1 billion.  Free cash flow (FCF) for the first quarter was a record $52.7 million, a 62% year-over-year increase. This is a marked improvement from the fourth quarter of 2021, when Revolve experienced a 16% year-over-year decrease in free cash flow due to inventory investments to support the surge in product demand seen in 2021. The company's response to the growing demand for its products and its return to increasing FCF growth indicates that the business is in a healthy place coming out of the COVID-19 lockdowns, which hurt its demand.

One of Revolve Group's marketing strategies is to host fashion events at big social occasions and music festivals. These include places like the Super Bowl and Coachella. At Coachella, it has its own Revolve Festival, a sub-festival for its fashion influencer partners and fans. The event has been a big success in growing the Revolve brand, however, this year the event had a bit of a hiccup, with transportation issues causing many ticket holders to wait for hours in the desert and miss the event. Revolve apologized, but this mishap may have contributed to the stock's drop over the last few months.

Huge long-term opportunity

In the first quarter, Revolve Group reported 2 million total active customers, up 38% year over year. Apart from a blip in the heart of the COVID-19 pandemic, total active customers have grown steadily since Revolve went public in 2019, indicating that the company is growing awareness among young shoppers.  But, according to overall demographics, the company is still in its early days if its end goal is to become a mainstream brand. There are an estimated 49.6 million women aged 12-34 in the United States (Revolve also operates in many international countries, which adds to the addressable market), meaning that the company has less than 5% penetration within its core audience.

The global womenswear industry is valued at $621 billion. Yes, it is a highly competitive market, but Revolve Group is slowly gaining some market share each and every year with its fast top-line growth rates. If it can get to even 10 million annual active customers around the globe, the company's revenue will likely be much higher than the $1 billion it is doing now.

Valuation looks reasonable

Revolve Group has a market cap of around $1.9 billion. Subtract out its $271 million in net cash  and it has an enterprise value of $1.6 billion. With its trailing free cash flow of $80 million, the stock trades at an enterprise value-to-free-cash-flow (EV/FCF) of 20,  or right around the market average.

What this should indicate to investors is that the market believes Revolve Group's growth over the next few years will be average and not in the strong double-digit range as it has been putting up.

So, is the stock a buy?

Revolve Group looks like a quality business that generates healthy cash flow and is riding a nice tailwind of fashion e-commerce. With the stock down so much this year, its trailing EV/FCF has gotten down to around the market average. If you believe Revolve Group can continue winning customers from its core demographic and grow its revenue at a fast rate, now could be a good time to buy some shares of the stock.