The market inched toward a recovery last week as data suggested inflation is slowing down. It had its best one-day gain in two years on Thursday after the data was released, with many stocks finally feeling some love. 

It's still down for the year, however. The S&P 500, a broad indicator of the total market, is down 16% in 2022, still falling short of a bear market. And while many stocks spiked, they were small gains in an ocean of declines.

Consider Revolve Group stock (RVLV -0.03%), which notched a modest gain last week and is still down 68% from its 52-week high. Investors weren't pleased with its third-quarter earnings report, but there's a lot to like here. Plus, at this price, shares may seem undervalued and merit your attention.

A passion for fashion

Revolve Group is a fashion company that sells apparel and related products on its two websites. But that's a simplified explanation for what's a very sophisticated and technical operation.

All of Revolve's efforts are based on a robust artificial intelligence infrastructure. For nearly 20 years, the company has been collecting data points about its millennial market, its likes and dislikes, and what calls it to action. The result is an efficient, sales-directed business that reaches its customers through their preferred outlets, with a particular emphasis on social media influencers. Its algorithms quickly figure out what products are hot and which ones are not, and since it's all online, it can adjust its merchandise accordingly. That results in a higher-than-average rate of full-price sales, 87% of the total in 2021.

Remaining strong when the economy is weak

Revolve's performance this year suggests that this is a company that can weather tough times. Even the recent third quarter, its toughest yet, indicated that it could grow sales and remain profitable under challenging circumstances.

Revenue increased 10% over last year to $269 million, and net income decreased 28% to $12 million. Free cash flow increased a whopping 543% to $8.6 million. 

This quarter was significantly pressured as compared to last year when sales increased 62%. However, it was strong under the circumstances, and there were other telling signs. For example, active customers increased 34% year over year over the trailing 12 months, and average order value increased 16%. Despite the gloomy economy, more customers are buying from its site, and at higher amounts. That's incredible stickiness.

Leading into the future of fashion

Revolve's reliance on artificial intelligence allows it to make disciplined and strategic decisions to operate in times of volatility. For instance, it's been able to keep inventory growth low as it quickly reacts to changing sales trends. 

Revolve Group inventory growth.

Revolve Group inventory growth. Image source: Revolve Group.

It also continued to seal partnerships with influencers that attract its core customers, such as an owned-brand collaboration with model Elsa Hosk that was one of its more successful launches ever, and the appointment of Kendall Jenner as the creative director of FWRD, the company's high-fashion web site. FWRD continues to be an important part of Revolve's business, growing sales 17% in the third quarter.

Why is Revolve stock down?

Revolve stock is down because investors' pessimism is sending many stock prices down, and the current atmosphere is pressuring Revolve's business. It's doing a great job of driving sales, profits, and cash flow under these conditions, but thinking about the future requires investor confidence in place of company performance.

At the current price, Revolve stock trades at a very reasonable 23 times trailing-12-month earnings. Considering its resonant business model, potential, performance under pressure, and healthy valuation, I would definitely recommend buying Revolve stock.