Fashion retail stocks have been beaten up in 2020 amid a plunge in consumer spending thanks to the novel coronavirus pandemic. But one fashion retail stock which looks like a strong buy amid recent weakness is Revolve (NASDAQ:RVLV) stock. Indeed, I think that RVLV stock could double over the next six months.
This is an online retail stock with huge tailwinds, lots of long-term growth potential and plenty of growth catalysts on the horizon. Yet, shares trade at a huge discount to peers.
That doesn’t make much sense.
I expect the valuation disconnect in RVLV stock to resolve itself in coming months. As that happens, shares will double from about $16 today to $30 by the end of the year.
Here’s a deeper look.
A Strong Long-Term Growth Narrative
The long-term growth narrative surrounding Revolve is promising, and it’s all about one thing: the social commerce boom.
We spend all of our time on social media. Like two and a half hours per day. In those hours, we come across various products and services in Facebook (NASDAQ:FB), Twitter (NYSE:TWTR) and Instagram feeds. And when those products and services are recommended by people we admire (like influencers), we pay attention.
A 2019 Rakuten survey found that 88% of consumers made a purchased based on an influencer recommendation.
This is the core idea of the influencer economy, and more broadly, social commerce: use people and social channels to grow brand awareness.
Brands are already starting to do this. Since 2016, influencer marketing spend has grown by nearly 500%. But at less than $10 billion in 2020, this market still represents just a fraction of the multi-hundred-billion dollar global ad market. Consequently, the use of influencers to sell products and services through social channels will grow exponentially over the next decade.
That’s great news for Revolve – a premium fashion company built on the back of influencer marketing and social commerce.
The online- and mobile-focused platform 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 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 modern retail platform built for the future.
As social commerce and influencer marketing gain more traction over the next several years, Revolve’s reach across the global retail landscape will expand. Significantly.
Healthy Near-Term Catalysts
There are four major catalysts which should positively impact Revolve’s business over the next six-plus months.
First, persistent and recurring Covid-19 disruptions to the physical shopping experience will promote continued robust uptake of online selling platforms, like Revolve.
Second, a broad economic recovery over the next few months will propel a rebound in consumer discretionary spending on things like shirts, shorts and shoes – the sort of stuff that Revolve sells.
Third, Facebook 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. This will provide a huge tailwind for the whole social commerce movement.
Fourth, the roll-out of Revolve’s “Virtual Vacations” this summer is an innovative initiative which could help spark a meaningful uptick in brand awareness and social engagement. This will also pave the path for increased sales.
Big picture: Revolve appears adequately positioned to deliver strong results over the next few quarters.
RVLV Stock Is Attractively Undervalued
Central to the bull thesis on RVLV stock is that shares are materially undervalued.
Every other online retail stock right now is trading at a huge premium. Wayfair (NYSE:W) stock is trading at more than 2-times trailing sales. Chewy (NYSE:CHWY) stock is trading at 4-times sales. Farfetch (NASDAQ:FTCH) stock is trading at 6-times sales. Etsy (NASDAQ:ETSY) stock is trading at 15-times sales.
Revolve, despite being an e-retailer like all of those companies, trades at 1.7-times sales.
That’s just too cheap for this online retail stock.
My numbers suggest that Revolve has a realistic opportunity to leverage e-commerce and influencer marketing tailwinds and power earnings per share toward $3 by 2025.
Assuming so, then based on a 20-times forward earnings multiple and an 8.5% discount rate, that implies a 2020 price target for RVLV stock of nearly $30.
That represents almost 100% upside from where shares currently trade.
Bottom Line on RVLV Stock
Revolve stock is one of my favorite stocks to buy for the second half of 2020.
You have a strong online retail stock, supported by robust e-commerce adoption tailwinds and trading at a discount to peers and fair value.
That’s a recipe for huge success.
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.