When Crocs (CROX -0.75%) shoes first came on the scene, they were so odd that director Mike Judge featured them in a social satire movie he produced called Idiocracy, which features a deeply satirical look at the future and society. His thought was that the shoes would never catch on, and thus, it would be funny to include them in the movie about future trends. Judge was clearly wrong about the popularity of the shoe, as the company generated $2.3 billion in revenue in 2021. If management is right, there's a lot more upside still to come for the footwear specialist.

Crocs stock is down ... a lot

Crocs' stock has fallen around 45% from its late 2021 highs. That's a massive decline, but, perhaps, one that was appropriate. At its peak in 2021, the company's price-to-sales (P/S) ratio exceeded 5. After the big price decline, the P/S ratio is down to 1.8 times. While that's not exactly a bargain basement level, it is far more reasonable.

A person looking at a laptop raising their arms as if frustrated.

Image source: Getty Images.

The interesting thing is that the company's revenue hasn't really cooled off any. Its trailing 12-month revenue trend continues along an upward slope that started in 2020, the first year of the coronavirus pandemic. It doesn't seem unreasonable that people were looking for comfortable footwear to use around the house while they were practicing social distancing and working from home. However, the allure of Crocs' products doesn't seem to have waned any, either, with third-quarter 2022 sales of its core brand up 14.3% year over year.

Total sales, meanwhile, rose a huge 57.4% year over year, because Crocs bought the HeyDude brand in early 2022. HeyDude's sales increased 87% year over year, which isn't surprising since it was starting from a smaller base and Crocs could push the brand through its distribution system. However, Crocs now has two brands to grow, with HeyDude offering a more traditional-looking shoe line. 

What about the stock?

The goal for the company is for more growth. For the smaller HeyDude brand, Crocs believes it can achieve $1 billion in sales by 2023. For Crocs, the goal is $5 billion by 2026. Since the company had sales of $2.3 billion in 2021, that suggests that sales will at least double over the next three years or so. If the company can do that and maintain its adjusted operating margins at around 26%, which is the goal, earnings growth could be substantial.

But there are some risks that have to be considered. For starters, the company seems to have benefited from a pandemic boost. The world has largely opened up again, which may mean a return to more formal footwear as people head back to work. That doesn't mean that casual footwear will suddenly fall flat, but there is a very real risk that Crocs will see a drop in demand. It doesn't appear to have happened yet, but investors would be remiss if they didn't consider the potential for a fashion shift that hurts the company.

Second, prior to the pandemic, sales had flatlined for years. That isn't exactly an inspiring growth backdrop when you consider that the pandemic boost could end up being temporary.

That said, the stock has fallen dramatically, and what appeared to be a stretched valuation has declined along with it. If management can actually meet its goals, using things like partnerships with fashion brands and celebrities to support demand, the stock is probably cheap today. That's the big decision point for investors to make. If sales growth continues, the stock will likely be an attractive investment. If sales peter out, they won't be.

Caution is in order

Crocs isn't exactly a one-hit wonder, with the addition of the HeyDude brand, but consumers are notoriously fickle when it comes to apparel. Even after a huge price decline, conservative investors should probably avoid Crocs because of the risk that consumer sentiment will turn against the brand. The shares, then, are most appropriate for growth investors, but you'll need to go in with a huge amount of faith in management's long-term goals. If Crocs falls short on the revenue growth front, there could be much more downside.