What a fantastic six months it’s been for Revolve. Shares of the company have skyrocketed 117%, hitting $33.49. This was partly due to its solid quarterly results, and the performance may have investors wondering how to approach the situation.
Is there a buying opportunity in Revolve, or does it present a risk to your portfolio? Get the full breakdown from our expert analysts, it’s free.Despite the momentum, we're sitting this one out for now. Here are three reasons why you should be careful with RVLV and a stock we'd rather own.
Why Is Revolve Not Exciting?
Launched in 2003 by software engineers Michael Mente and Mike Karanikolas, Revolve (NASDAQ:RVLV) is a fashion retailer leveraging social media and a community of fashion influencers to drive its merchandising strategy.
1. Customer Spending Decreases, Engagement Falling?
Average revenue per buyer (ARPB) is a critical metric to track for online retailers like Revolve because it measures how much customers spend per order.
Revolve’s ARPB fell over the last two years, averaging 9.5% annual declines. This isn’t great, but the increase in active customers is more relevant for assessing long-term business potential. We’ll monitor the situation closely; if Revolve tries boosting ARPB by taking a more aggressive approach to monetization, it’s unclear whether buyers can continue growing at the current pace. 
2. EBITDA Margin Falling
Operating income is often evaluated to assess a company’s underlying profitability. In a similar vein, EBITDA is used to analyze consumer internet companies because it excludes various one-time or non-cash expenses (depreciation), providing a clearer view of the business’s profit potential.
Analyzing the trend in its profitability, Revolve’s EBITDA margin decreased by 7 percentage points over the last few years. Even though its historical margin is high, shareholders will want to see Revolve become more profitable in the future. Its EBITDA margin for the trailing 12 months was 5.5%.
3. EPS Trending Down
Analyzing the change in earnings per share (EPS) shows whether a company's incremental sales were profitable – for example, revenue could be inflated through excessive spending on advertising and promotions.
Sadly for Revolve, its EPS declined by 22.4% annually over the last three years while its revenue grew by 11.4%. This tells us the company became less profitable on a per-share basis as it expanded.
Final Judgment
Revolve isn’t a terrible business, but it isn’t one of our picks. After the recent rally, the stock trades at 35.5× forward EV-to-EBITDA (or $33.49 per share). This multiple tells us a lot of good news is priced in - we think there are better investment opportunities out there. We’d suggest looking at ServiceNow, one of our all-time favorite software stocks with a durable competitive moat.
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