By now, it's old news that unprofitable growth and "story" stocks have endured massive sell-offs this year. Many of last year's favorites are down 70% or more as investors worry about their lack of profits and cash flow in a more challenging economic environment. But how about a growth stock down 70% that is not only profitable, but consistently growing profits? What's more, this stock has a very reasonable valuation.
I'm talking about Revolve Group (RVLV -1.87%), and it looks like this high-quality, decently valued growth stock has been thrown out with the proverbial bathwater as investors have panic-sold all things growth. Let's take a look at how Revolve Group is different from many of the other fallen growth stocks and what makes its decline look like an attractive buying opportunity.
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What is Revolve Group?
Revolve Group is a $2 billion California-based online fashion retailer that sells apparel and accessories primarily to the millennial and Gen Z demographic. The company operates two different business segments, REVOLVE and FWRD. REVOLVE is geared toward fashion and apparel whereas FWRD focuses on luxury items. What makes Revolve interesting is that it uses proprietary technology to extensively canvas social media like TikTok, Snapchat, and Instagram to learn and ascertain what styles are trending. It then uses that data to forecast trends and manage inventory. The algorithm-enhanced approach and rapid rotation help it to maintain a fresh mix of inventory (with over 1,300 new products per week on average in 2021), avoid overstocking, and keep customers coming back to see what's new.
The company also uses an array of influencers on popular social media platforms to showcase its products to their large audiences, who are often looking for inspiration on what to buy and wear. Revolve further leverages the power of these influencers by featuring curated collections by them. This strategy seems to be working, as 65% of Revolve's e-commerce sales are from mobile devices, indicating that many customers are going straight from scrolling social media to Revolve to buy something that they see highlighted. The company now has 2 million active customers.
Not your average "story" stock
The innovative and tech-enabled business model is a great story. But plenty of "story" stocks may never revisit their old highs again as they struggle to become profitable. Here's what makes Revolve Group different: The company is profitable, and it is growing profits at an impressive pace. While adjusted EBITDA fell from $8.5 billion in Q1 2019 to $5.6 billion in Q1 2020 during the onset of the coronavirus crisis, the company rebounded strongly and hit $23.3 billion in Q1 2021 and $31.5 million in Q1 2022. Earnings are now almost four times what they were prior to the pandemic. Revolve has also grown first-quarter net sales at a 27% compound annual growth rate (CAGR) over the last three years.
The company is also performing well and showing increases across other key metrics like active customers, total orders placed, and average order value. I'm also impressed by Revolve's efficiency -- capital expenditures are less than 1% of net sales.
Finally, Revolve is also better situated than some of the other e-commerce stocks that have plummeted from their highs because it has a very strong balance sheet, with a large cash position and no long-term debt.
And this impressive performance is available for a very reasonable valuation. Shares of Revolve cost just 20 times earnings and 17 times forward earnings. A PEG ratio of just 0.7 also indicates that the stock is undervalued in light of its earnings growth.
Is Revolve Group a buy?
Going forward, the market should start to eventually separate the wheat from the chaff and more investors should begin to recognize Revolve Group as the high-quality earnings growth story that it is. The current decline in its share price seems unwarranted and looks like an attractive buying opportunity for a compelling long-term investment.
