Best Stocks for 2022: The ‘RH for Millennials’ Could Soar as the Housing Market Booms

Stocks to buy

Editor’s note: This column is part of InvestorPlace.com’s Best Stocks for 2021 contest. Luke Lango’s pick for the contest is Arhaus (NASDAQ:ARHS) stock.

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Source: InvestorPlace

Nearly five years ago, or what feels more like a decade in pandemic time, I discovered one of my biggest winners in the market. It wasn’t a super flashy tech stock, but instead an early stage hypergrowth furniture company by the name of Restoration Hardware (NYSE:RH).

Restoration Hardware is a premium furniture retailer that sells very expensive couches, tables and more through dozens of ultra-exclusive showrooms across the world.

To most folks, the company doesn’t scream “hypergrowth.” But in 2017, I wrote the following:

“RH is reinventing itself… this is a business that could potentially more than double its sales…. [so] it’s reasonable to claim that RH is a growth stock still trading at a discount. That is a good setup for this rally to continue.”

At the time, RH stock was trading around $70. Earlier this year, it touched $744 — up more than 10X in just four years.

That’s relevant to the picture I want to paint today because I think I just found the next RH — another early stage hypergrowth furniture stock that could score you 10X returns in just four years.

I like to call it “Restoration Hardware for millennials,” which is a big positive because millennials are turning into the backbone of the housing market. And, by extension, turning into the backbone of the furniture market.

It’s easy to see how this stock could 10X in a hurry, let alone become one of 2022’s biggest winners and best stocks.

And One of the Best Stocks of 2022 Is …

Arhaus (NASDAQ:ARHS) — a premium furniture retailer founded in 1986. While its initial public offering was poorly received and it’s valued at just $2.5 billion today, there’s plenty of reason to love ARHS stock in 2022.

Much like RH and other premium furniture retailers, the company sells a variety of high-end couches, tables, chairs, and more through its many showrooms across the United States.

What sets Arhaus apart is its digital marketing strategy. Whereas RH is a very old-school and a somewhat “stuffy” brand that likes to do things the “traditional” way (RH doesn’t even have a social media presence), Arhaus, in contrast, leans heavily into its social presence to develop its brand equity — and that’s just part of what makes it one of the best stocks for 2022.

The company’s Instagram page, for instance, sports more than a million followers, a number that’s more than doubled each year from 2018 to 2020. Arhaus also taps influencers to market and sell its products — a strategy that appears to be doing wonders for the company.

Arhaus has recently leveraged this innovative digital marketing strategy to strike gold, becoming the hottest premium furniture retailer brand on the internet.

That’s no small feat. And the numbers back it up.

Comparable sales at Arhaus rose 20% in the fourth quarter of 2020, 38% in the first quarter of 2021, and 71% in the second quarter of 2021. Then, in the third quarter, comparable growth came in at 61.3%.

Arhaus currently operates 77 showrooms across 28 states. Long-term, the company hopes to operate upward of 165 showrooms across the country.

Less than 20% of the company’s revenues are from online sales, but that e-commerce sales base is growing at a 60%-plus clip. About 80% of the company’s clients are from households with an income of $100,000 or greater.

Where ARHS Stock Will Go in 2022

When I covered RH in 2019, I made it a point to say that if the housing market continues to slow then so too would RH’s growth. However, the housing market bounced back and financial markets found their footing — allowing RH stock to grow upward of 300% since I wrote that article.

Today, the housing market is firing on all cylinders. High demand and low inventory aren’t going anywhere; in fact, it will be exacerbated in 2022 as millennials entering the market (and unburdened by in-office work) look to buy their first home. And just like throughout 2021, the sellers will remain in control as first-time homebuyers compete against repeat buyers in an industry starved for inventory.

According to Zillow, we’ll see more than 6 million people looking to buy a home in 2022. That’s roughly in line with 2021. The likelihood of that exuberance for homes spilling over into the rental market is high. Both of which portends great things for ARHS stock as one of the best stocks of the year.

While there have been murmurs from bears that growth in housing is unstainable or “a bubble,” the housing market looks due for a decade-long boom, thanks to the following three reasons:

  1. Demographic tailwinds propping up demand as millennials become homeowners while baby boomers look to downsize.
  2. Tight supply from a previous decade of underbuilding from homebuilders in the wake of the 2008 housing crash.
  3. Ultra-cheap financing on the back of rising, but still-low interest rates.

Why does any of this matter? Well, as goes the housing market, so goes the furniture market.

We believe the premium furniture market will witness outsized growth, mostly because the backbone of the housing market — millennials — is a generation of consumers who, thanks to social media, are obsessed with status. Therefore, we see many of these homebuyers buying high-end furniture.

In this premium market, RH rules supreme. But to many young consumers, RH feels like their parents’ furniture store. Millennials want something different. Therefore, there exists an enormous opportunity for a new premium furniture retailer to emerge, resonate deeply with younger consumers, and win big in the 2020s.

Arhaus appears to be in a tentpole position to be that retailer, with its leading social presence, premium product, and younger-feeling brand and design.

How Big Can Arhaus Get?

I keep coming back to this RH comparison because it is valid and helps put Arhaus’ growth trajectory in perspective. Just consider that RH is slated to do about $4 billion in revenues this year. Let’s say Arhaus can get that big by 2030, which implies $2 billion in revenues by 2030. That correlates to a 12% revenue compound annual growth rate (CAGR) over the next nine years, which seems reasonable.

Back to RH, it operates on 45% gross margins with 25% EBITDA margins. Assuming a similar profit margin profile, Arhaus could produce $500 million in EBITDA by 2030.

RH trades around 16X trailing EBITDA. A similar multiple would produce a long-term EV target for Arhaus of $8 billion. And that math assumes Arhaus only gets half as big as RH.

Bottom Line on ARHS Stock

I live and breath technology. But sometimes, there exist compelling 10X opportunities in the market outside of the tech sector. RH was one such opportunity four years ago. It has since soared 10X.

Now, Arhaus has “next RH” written all over it. I wouldn’t be surprised to see this stock soar several hundred percent in a hurry. Thus, Arhaus is one of the best stocks for investors in 2022.

On the date of publication, Luke Lango did not have (either directly or indirectly) any positions in the securities mentioned in this article.

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