Over the past six months, Revolve’s stock price fell to $25.36. Shareholders have lost 13.3% of their capital, which is disappointing considering the S&P 500 has climbed by 8.6%. This might have investors contemplating their next move.
Is there a buying opportunity in Revolve, or does it present a risk to your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.
Why Do We Think Revolve Will Underperform?
Even with the cheaper entry price, we’re sitting this one out for now. Here are three reasons why there are better opportunities than RVLV, plus one stock we’d rather own.
1. Change in Active Customers Points to Soft Demand
As an online retailer, Revolve generates revenue growth by expanding its number of users and the average order size in dollars.
Over the last two years, Revolve’s active customers , a key performance metric for the company, increased by 5.8% annually to 2.93 million in the latest quarter. This growth rate lags behind the hottest consumer internet applications. If Revolve wants to accelerate growth, it likely needs to engage users more effectively with its existing offerings or innovate with new products. 
2. Poor Marketing Efficiency Drains Profits
Unlike enterprise software that’s typically sold by dedicated sales teams, consumer internet businesses like Revolve grow from a combination of product virality, paid advertisement, and incentives.
It’s expensive for Revolve to acquire new users as the company has spent 59.3% of its gross profit on sales and marketing expenses over the last year. This inefficiency indicates that Revolve’s product offering can be easily replicated and that it must continue investing to maintain an acceptable growth trajectory.
3. EPS Barely Growing
We track the long-term change in earnings per share (EPS) because it highlights whether a company’s growth is profitable.
Revolve’s EPS grew at 7.5% compounded annual growth rate over the last three years. On the bright side, this performance was better than its 5% annualized revenue growth and tells us the company became more profitable on a per-share basis as it expanded.
Final Judgment
Revolve falls short of our quality standards. After the recent drawdown, the stock trades at 15.2× forward EV/EBITDA (or $25.36 per share). At this valuation, there’s a lot of good news priced in - we think other companies feature superior fundamentals at the moment. We’d suggest looking at one of Charlie Munger’s all-time favorite businesses.
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