I listened to Raissa Gerona, the chief brand officer of Revolve, on the Glossy Podcast. I had never heard of the Glossy Podcast before, but it looks worth following on Spotify. Since Revolve is the biggest position in my portfolio, I would like to give my thoughts on Revolve before the Revolve Festival.
I recommend any shareholder of Revolve listen to the episode. It was very informative and gave a good primer on the state of the business.
Influencer marketing is still early.
Influencer marketing may seem oversaturated, but it’s still in its early stages and has doubled in size since 2019. The bigger the market grows, the better it is for the business and the stock. This type of marketing allows companies to engage with their customers on a personal level. User growth for Instagram and TikTok is expected to be steady for at least five years, so I don’t see any cause for concern about this form of advertising in the next decade.
“As someone who’s worked there for 11 years, it gives me peace of mind knowing that we have very senior leadership that understands the ebbs and flows of the business, and that’s gone through multiple recessions and obviously Covid — we’ve never experienced anything like this before. In 2019, we were doing $500 million in [annual] revenue, and then we just crossed $1 billion in revenue in 2022. “
The threat of TikTok being banned in the US is real, but Revolve has a strong presence on Instagram and YouTube shorts. If necessary, they have the team in place to pivot to where their customers spend most of their time.
Revolve Festival returns on April 15 and 16.
The festival will have a fifteen-foot sunken UFO – whoa!
Looking at Revolve long-term, I see them opening up a flagship store in Los Angeles within the next five years. They should prioritize international expansion, Web3, and men’s wear. If a strategic acquisition target is available, they should pursue it more aggressively. 2023 is a good year to take on more obligations if it leads to meaningful future growth. Valuations for buyers are much more attractive than in the past few years.
Overall I see Revolve in a good position. They have a loyal customer base, and I see them capturing more female gen z clients, especially those born after 2000.
Free Cash Flow Problem?
Revolve’s Free Cash Flow influx mirrors that of Amazon. Revenue was up for these companies, and free cash flow was down.
Free cash flow is the cash from operations minus capital expenditures. Although free cash flow was down due to increased CapEx, these investments in brand marketing and fulfillment centers will produce a positive ROI. Forgoing profits for growth and expansion is a winning strategy in the long term. I would rather see a company invest than sit on cash. When the economy improves and demand returns, those investments will likely pay off and be reflected in the balance sheet.
Stock price vs. Intrinsic value.
The stock price of Revolve is publically available for anyone to view. The intrinsic value of Revolve is subjective, based on qualitative and quantitative factors of the business. I always go back to the great quote from Benjamin Graham: In the short run, the stock market is a voting machine, in the long term, it’s a weighing machine. This means that in the short term, the stock price may be influenced by sentiment, news, and market trends, but in the long term, the stock price will reflect the true value of the business.
Many investors, even good ones, make the mistake of following the stock price and letting the price movement dictate their thinking on how the business is doing. Like other e-commerce platforms, Revolve is currently mispriced and undervalued. Growth companies, particularly in e-commerce, are often grossly overvalued or undervalued based on future free cash flow.
Netflix’s stock price hovered around 175 in the summer. In March, it was trading at over 345.
Meta’s stock price hovered around 90 in November. In March, it was trading at over 200.
Nvidia’s stock price hovered around 145 in December. In March, it was trading at over 275.
Based on the stock price falling dramatically last year, you would think these three companies were distressed. It is hard to believe the intrinsic value of these three large companies changed that much in a few months.
The stock price dictates public sentiment, but the intrinsic value can take a while to metastasize and reflect for shareholders. It would help to ignore the noise because most stock analyses and commentary you see daily do not matter.
How I view investing:
The intrinsic value of Revolve is worth at least 100. Will that be reflected in the stock price? It will likely happen before 2030. Thus, I have never sold any positions I have accumulated over the past four years. That’s the bet I am making.
I can live with the stock price going to zero (unlikely). That’s the risk of investing. The good news is that is the worst-case scenario, or is it? What’s worse, buying a stock and watching your investment go to zero or buying a stock, doing the research, having the conviction, but selling too early and watching the stock generate 100x or more returns. The latter scenario for me is the worst-case scenario. Ask investors who held Amazon in the 2000s but sold because the stock was “too expensive” or those that sold Google in 2008 because the P/E ratio was “too high.”
Investors will make a lot of mistakes. People make a lot of mistakes in their life. 99.9% of them, you can recover from them. With a losing investment comes a lesson to learn. The biggest tragedy in investing comes from missing out on gains in something you believed in but didn’t have the patience in to reap the rewards. That would be a deep regret of mine.
Great investors will fail. With great success comes failure.
LeBron James has been to the NBA Finals 10 times. Six of those times, his team lost.
Tom Brady has been to the Super Bowl 10 times. Three of those times, his team lost twice to Eli Manning and once to Nick Foles!
Aaron Judge hit 62 home runs in 2022 and struck out 175 times that season.
Success comes with failure, but if you succeed enough times, those failures don’t become deep lifetime regrets. That’s why I am not a big fan of index investing. Index investing still carries risk but produces muted gains. The entire mantra of index investing is that active investing is too hard or unpredictable, so you shouldn’t try. I’m afraid I disagree with that philosophy; it would be like saying dieting is too hard, so you should take diet pills or supplements instead of trying to eat healthily.
I expect Revolve to be a big-time winning investment. I bypassed other lucrative opportunities like adding to my Amazon position or starting a new position in Lululemon and Louis Vuitton. Will it pay off?
Based on my research, I believe Revolve has a solid competitive position in the fashion industry and strong growth potential. Their focus on influencer marketing and customer engagement through social media has been successful and will likely continue to drive growth. Revolve is a good investment opportunity for those interested in the fashion industry and the potential growth of influencer marketing. While the stock price may fluctuate in the short term, I am optimistic about the company’s long-term prospects and see them as a strong player in the industry.
Invest in Myself 