Revolve (NASDAQ:RVLV) stock popped by 20% to its pandemic-era highs in mid-August after the online fashion retailer reported second-quarter numbers which came in well above analysts’ average expectations. Moreover, the firm’s management made favorable comments about its growth trends in Q3.
RVLV stock has now roughly tripled from its March lows, and its big rally isn’t over yet.
That’s because spending on fashion will rebound over the next few months. Meanwhile, e-commerce will continue to grow rapidly, and the company will continue to innovate impressively. Also helping Revolve will be its lean operating model.
Together, these trends will spark enormous revenue and profit growth by the firm. That enormous revenue and profit growth will drive equally enormous gains by Revolve stock.
As a result, I think the stock will rally towards $30 by the end of the year, so investors should stick with the name.
Here’s a deeper look.
Revolve’s Strong Earnings
Revolve’s Q2 earnings report was much stronger than expected.
Its Q2 revenue was supposed to fall more than 25% year-over-year in the quarter, due to anemic spending by consumers on fashion products like dresses and skirts.
Indeed, its revenue did drop in the quarter. But instead of plunging 25%, it fell only 12%. More impressively, its revenue-growth trend has improved since April, and its sales rose YOY in every month since June.
Revolve expects low-single-digit-percentage revenue growth in Q3. On average, analysts predicted that its revenue would drop by 10% YOY in Q3.
So Revolve’s revenue is trending far better than expected and returning to normal much sooner than most anticipated. There are a few factors behind the company’s quick rejuvenation.
First, a sharp rebound in consumer spending helped, as consumers have become less “paralyzed” by Covid-19. Secondly, easing mobility restrictions across the globe is leading to consumers going out more now than they were in March and April.
That, in turn, sparked rebounding demand for Revolve’s core apparel products. Third, strong innovation during the quarter on the marketing, inventory management and product expansion fronts boosted its top line.
At the same time, the firm’s gross margins improved two percentage points in Q2 versus Q1. Meanwhile, its marketing and general and administrative spending fell significantly YOY because of furloughs and a lack of spending on in-person events. (Revolve usually hosts big festivals to market its products, but obviously it didn’t sponsor such events this year).
As a consequence of those factors, Resolve’s EBITDA margins, excluding certain items, rose to 14.6%, an all time high as a publicly traded company, and its adjusted EBITDA climbed 10% YOY.
So, from top to bottom, it was a really solid quarter from Revolve. The company benefited from recovering revenue trends, stabilizing gross margins, improving net margins, and rising profits.
RVLV stock is supported by favorable growth trends.
First, spending on apparel will continue to rebound. That’s because the world is getting better and better at the Covid-19 balancing act. Specifically, we are learning how to maintain quasi-normal social interactions while keeping people safe. The better we get at this balancing act, the more consumers will go out. The more consumers go out, the more they will spend on clothes.
Second, spending on apparel will rapidly migrate online. It’s no secret that Covid-19 accelerated the adoption of e-commerce. This acceleration will continue, even as retail stores reopen, because consumers, particularly young consumers, like to shop for clothes online.
Third, impressive innovation by the firm in Q2 laid the groundwork for sustained growth.
Specifically, its management has figured out how to virtualize its marketing efforts by sponsoring virtual events. The company is also emphasizing data-driven inventory management, enabling it to offer more beauty products, while also become a leading seller of stylish face masks.
At the same time, Revolve continues to automate processes at the company’s distribution centers, permanently reducing its fulfillment costs and boosting its margins.
These innovations give Revolve ample firepower to sustain healthy revenue and profit growth trends over the next few quarters. That’s because they enable the company to always sell the right product to the right customer through the right channel at the right price.
Revolve Stock Is Undervalued
In light of the company’s favorable growth trends, RVLV stock looks awfully cheap today.
Every other online retail stock right now is trading at a huge premium to the market’s average valuation. Wayfair (NYSE:W) stock is trading for more than 2.5-times its trailing sales. Chewy (NYSE:CHWY) stock is trading for four times its sales. Etsy (NASDAQ:ETSY) stock is trading for 15 times its sales.
Even though it’s an e-commerce retailer like all of those companies, Revolve trades for just two times its sales.
That’s just too cheap for this online-retail stock.
My estimates continue to indicate that Revolve has a realistic opportunity to use positive e-commerce and marketing catalysts to increase its earnings per share to nearly $3 by 2025.
Based on that EPS of $3, a forward price-earnings multiple of 20, and an 8.5% discount rate, that works out to a 2020 price target for RVLV stock of nearly $30.
The Bottom Line on RVLV Stock
Revolve’s stock has been on fire for the past five months.
That big rally won’t cool off anytime soon.
If anything, it will accelerate, as spending on apparel recovers and strong e-commerce adoption, in conjunction with Revolve’s hugely discounted valuation, will spark meaningful gains by RVLV stock.
This stock will finish the year closer to $30, versus its closing price on Friday of $22.29.
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 did not hold a position in any of the aforementioned securities.