Buy Revolve Stock for Huge Gains in the Social Commerce Boom

At one point in time, Revolve (NASDAQ:RVLV) stock was a highflier on the idea it had created a next-generation fashion platform perfectly tailored to the needs, demands and wants of young consumers. Wall Street was smitten. That was back in mid-2019. When RVLV stock popped from an $18 initial public offering (IPO) price to a nearly $50 price tag in just a few weeks. Then things went south.

Buy Revolve Stock for Huge Gains in the Social Commerce Boom

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The red-hot Revolve growth narrative — which was built on the back of steady 20%-plus revenue growth quarters and big profit margin expansion — stalled out.

In the third quarter of 2019, Revolve’s adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) margins dropped 5 basis points year-over-year. In the fourth quarter of 2019, Revolve’s revenue growth rate slipped below 20%, and in the first quarter, it slipped below 10%.

Investors implied from the slowdown that Revolve was losing its hold on the millennial demographic. They sold Revolve in bunches, cutting shares down to $15.

But, today, the trends are changing dramatically in favor of Revolve regaining its grasp on the millennial demographic. As that happens, the Revolve growth narrative will re-accelerate over the next few quarters. Investors will buy back in. And Revolve shares will fly to nearly $30.

Here’s why.

A Little Background on RVLV Stock

First, let’s understand what exactly differentiates Revolve as a fashion company.

In short, the company has created a fashion apparel platform built for modern times and modern consumers.

Revolve is an online- and mobile-focused platform, which leverages influencers (like Kim Kardashian) and social events (like the Revolve Festival at Coachella) to drive brand awareness, reach new customers, build brand equity, promote new products and ultimately drum up demand. The company also leans into its vast wealth of social and purchase data to create trend-forecasting algorithms which ensure that its apparel portfolio is always “on-trend”.

It’s a smart business, because it’s built to be the ideal shopping platform for young consumers. Sure, that young demographic doesn’t have much money today. But they will grow up. They will get jobs and promotions. They’ll earn more money, and they’ll spend that additional money on Revolve, leading to bigger sales and profit growth.

That’s the hope, at least.

And it’s been working. Since 2016, Revolve’s sales are up nearly 100%, while adjusted EBITDA is up almost 500%.

But it stopped working in late 2019 and early 2020, for various reasons. As a consequence, Revolve’s stock has suffered.

Two Major Shifts

Two major shifts are happening right now which will help Revolve get back to firing on all cylinders.

First, the novel coronavirus pandemic has permanently accelerated the shift towards e-commerce. Revolve is an e-commerce platform. As such, this shift is a huge near- and long-term benefit for the company, as consumers increasingly use their phones and computers to buy clothes.

As you can see, Revolve’s web traffic actually surged in May.

Second, Facebook (NASDAQ:FB) is more aggressively integrating commerce into its platforms — including Instagram — with a new initiative called Shops. Shops should accelerate how much consumers interact with brands and shop through social media. It’s a big push into the era of social commerce.

That’s a huge win for Revolve, which is a fashion brand built on the back of social media. The bigger the social commerce gets, the more relevant Revolve becomes as a fashion brand for young consumers.

Big picture: thanks to the acceleration of e-commerce and social commerce in early 2020, Revolve is positioned to re-accelerate in its growth trajectory over the next few quarters.

Revolve Stock to $30?

By my numbers, Revolve stock could surge to $30 by the end of the year.

I broadly believe that, thanks to secular tailwinds and strong demographic trends, Revolve will sustain 20%+ revenue growth for the next five years. Alongside that big revenue growth, strong demand should help the company sell more items at full-price, and therefore provide a lift to gross margins. Scale should also drive positive operating leverage, and push the opex rate lower.

If you put all that together, then you’re talking about a fashion company that can grow profits by 25%+ over the next few years.

Assuming so, my modeling suggests that Revolve can very realistically achieve $2 in earnings per share by 2025. Based on a 20-times forward earnings multiple — which is historically average for consumer discretionary stocks — and a 10% annual discount rate, that equates to a 2020 price target for Revolve of $27.

Thus, by the end of the year, I see prices closer to $30 as doable.

Bottom Line on Revolve Stock

Revolve lost its groove in late 2019. But over the next few months, this next-gen fashion company will get its groove back. As the company does, the growth trajectory will re-accelerate, and the stock will soar higher.

Net net, over the next six months, Revolve’s stock could almost double.

Luke Lango is a Markets Analyst for InvestorPlace. He has been professionally analyzing stocks for several years, previously working at various hedge funds and currently running his own investment fund in San Diego. A Caltech graduate, Luke has consistently been recognized as one of the best stock pickers in the world by various other analysts and platforms, and has developed a reputation for leveraging his technology background to identify growth stocks that deliver outstanding returns. Luke is also the founder of Fantastic, a social discovery company backed by an LA-based internet venture firm. As of this writing, he was long FB.

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