Is it becoming increasingly difficult to find bargains on the market? The S&P500 is up 72% since its 2022 low. That’s an incredible increase in a short time, and shares have risen to valuations to match it.
But not all stocks are hitting highs. Many companies are still feeling the impact of high inflation, and this is reflected in their share prices. With inflation cooling, it looks like things are starting to change, and this could now be a turning point. Consider an e-commerce fashion store Rotate group (NYSE: RVLV). The company just released an excellent third-quarter earnings report, but while the stock jumped on the news, it’s still down 63% from highs at the time of this writing. Let’s dive in and see why it’s so good, and why it could be a great candidate for a growth-oriented portfolio.
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Revolve is an e-commerce superstar that sells high fashion through two websites: Revolve, and the haute couture site, FWRD. It has come up with a formula for selling clothes that reach the target market in the right place, built on an AI and machine learning infrastructure that powers all its activities. Another way Revolve differentiates itself is its focus on social media and influencer marketing, which has been a pillar of the strategy since the beginning.
The concept resonates in Revolve’s market and customers love it. Throughout the busy period, with lower sales and profits, Revolve continued to add active customers even though the average order value was lower. Now the company is back on the rise and had a great third quarter.
Revenue rose 10% year over year and earnings per share (EPS) more than tripled from $0.04 last year to $0.15 this year, beating analyst expectations of $0.10.
The number of active customers increased by 5% compared to last year, the total number of orders placed increased by 3% and even the average order value increased by 1%. These statistics provide a more complete picture of what’s happening at the company and how people are engaging.
Management attributed much of the performance to efficiencies across the board, driven by the AI systems. Marketing spend and logistics efficiencies led to significant cost savings, and the AI component helps the company fine-tune its merchandising and marketing to reach the right customers. The country has also reduced its returns rate, which has hit its margins. It has launched several initiatives to bring it back, including a better sizing and fit tool, which has led to lower return rates and also higher conversions. This is an example of how Revolve uses its AI and technical expertise to create meaningful improvements.
This was not a one-off, fluke. It is the result of better operational systems, a niche market that the country knows well, and moderating inflation. Revolve is still a fairly small company, with just over $1 billion in sales over the last twelve months, and has a long growth trajectory as it takes market share.
I have to admit that Revolve’s price has already risen even higher as I was writing this, and it’s reaching a price point that looks expensive. The one-year price-to-earnings ratio went from around 35 in recent weeks to 43. I view this as a preferable valuation metric to the rolling price-to-earnings ratio, due to the recovery in net income and the likelihood that it will remain at this level will continue and grow. 43 might still be reasonable for a high-growth stock, but I wouldn’t call it cheap. If Revolve’s business continues to accelerate, this can still be called a good deal.
If you’re looking for the best access point, you might be over. Alternatively, if the market takes a dip, you may get better opportunities. But you can’t time the market. Looking five years or more into the future, Revolve will likely report healthy revenue and earnings, and shares should rise accordingly. If you have a long time horizon and are looking for a strong growth stock, consider adding Revolve to your holdings.
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Jennifer Saibil has no positions in any of the stocks mentioned. The Motley Fool holds and recommends positions in Revolve Group. The Motley Fool has a disclosure policy.
1 Stock Down 63% to Buy Now was originally published by The Motley Fool
