Significant Decrease of 63% Makes This Stock an Attractive Purchase Opportunity Now
Is the market becoming more expensive to find bargains? The S&P 500 has surged by 72% since its 2022 lows, an impressive rise in a short span. This surge has led to stocks reaching valuations that are hard to ignore.
However, not all stocks are experiencing this upward trend. Many companies are still grappling with the effects of high inflation, and it's reflected in their stock prices. As inflation starts to cool down, though, things seem to be shifting, and now could be a turning point. Take, for example, e-commerce fashion retailer Revolve Group (RVLV, 1.01%). Despite an impressive third-quarter earnings report, the stock is still 63% below its highs. Let's discuss why it's been performing well and why it could be an excellent addition to a growth-oriented portfolio.
The AI advantage
Revolve is a successful e-commerce platform that sells high-end fashion through its two websites – Revolve and FWRD. It has managed to strike a chord with its target market by leveraging artificial intelligence (AI) and machine learning technologies to support its operations. Another factor that sets Revolve apart is its attention to social media and influencer marketing, a core part of its strategy since the beginning.
This approach has resonated with its customer base, as seen during the challenging period marked by lower sales and profits. Despite this, Revolve managed to gain active customers, even with a lower average order value. Now, the company is back on an upward trajectory, enjoying a stellar third quarter.
Sales grew by 10% year over year, and earnings per share (EPS) more than tripled from $0.04 in the previous year to $0.15 this year, exceeding analysts' expectations of $0.10.
The number of active customers increased by 5% compared to the previous year, while total orders placed climbed by 3%. Additionally, average order value increased marginally by 1%. This data provides a more comprehensive picture of the company's performance and customer engagement.
Management credited the impressive results to operational efficiencies, largely driven by AI systems. This led to significant cost savings in marketing spend and logistics, as well as improved merchandising and marketing targeting. Moreover, the AI systems have helped Revolve reduce its return rate, which had been impacting its margins. Initiatives, such as a better size and fit tool, have led to lower return rates and higher conversions, showcasing how Revolve leverages its AI and technology expertise to generate meaningful improvements.
This success is far from a one-time occurrence. It's a testament to better operational systems, a niche market that Revolve understands well, and the moderating effects of inflation. Revolve remains a relatively small company, generating only $1 billion in trailing 12-month sales, but it has significant potential as it captures market share.
Is the price justifiable?
I have to admit that Revolve's price has escalated during the time I was writing this, reaching a level that appears expensive. The forward, 1-year price-to-earnings ratio (P/E) has increased from roughly 35 to 43 over the past few weeks. While a 43 P/E ratio could still be reasonable for a high-growth stock, I wouldn't classify it as cheap. If Revolve's business continues its upward trend, this pricing could still be considered a good deal.
If you're looking for the perfect entry point, you may have missed your chance. Alternatively, if the market experiences a downturn, you might get a better opportunity. But timing the market is challenging. Looking ahead, five, or even ten years, Revolve is likely to continue reporting strong sales and earnings, leading to further stock price appreciation. With a long-term perspective and a desire for strong growth stocks, consider adding Revolve to your portfolio.
The surge in the market has made it challenging to find financial bargains, yet some stocks like Revolve Group are still significantly undervalued. Despite reporting impressive third-quarter earnings, Revolve's stock is 63% below its highs, indicating potential for investing opportunities in the finance sector.
Revolve's robust performance is largely due to its innovative use of AI and machine learning technologies, which have led to operational efficiencies and cost savings. With its niche market focus, Revolve's potential for market share expansion and strong growth makes it an attractive investment option in the world of money and investing.
