First Reports On This IPO Are Bullish
After a stock begins trading, analysts are not allowed to issue reports for some time. As the quiet period ends, analyst reports are issued and as Bloomberg reported, “the end of Revolve Group Inc.’s (NYSE: RVLV) quiet period was met with a chorus of buy ratings from Wall Street, with only one analyst straying from the pack.
And even he praised the fashion e-tailer, but cited worries over valuation for his hold-equivalent rating.
The analysts widely cited Revolve’s financial performance, influencer marketing strategy and opportunities to expand internationally as key differentiators and growth drivers.
“Revolve is the future of retail and brand marketing with its digital commerce platform built on a data-driven backbone and an enviable influencer ecosystem,” Jefferies analyst Randal Konik wrote.
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In all, Bloomberg data showed nine analysts coming forward with ratings on Revolve, with eight buys and one hold.
For Jefferies, Randal Konik said, “We see Revolve’s growth and market share gains in the first inning.”
Stock has upside to $60 or higher, based on: low market share with large total addressable market; strong margins that are likely to head higher; platform flywheel that drives new and existing customer site traffic; proprietary systems drive efficiency.
“Proprietary systems and also help curate assortments, effectively target new and existing customers, and predict trends.”
He rates the stock a buy and has a Street-high price target of $60
Cowen’s Oliver Chen noted “Revolve is well-positioned to grow its active user base as it captures fashion-focused Millennial and Gen-Z shoppers through its on-trend assortment, its influencer-based marketing model, and its emphasis on experiential events to promote the brand.”
“Revolve’s data-driven foundation and proprietary technology entrench the business versus both digitally native and brick-and-mortar competitors within the fashion retail space.”
Sales are growing in the +20% range, margins are expanding via “owned brand penetration growth and ongoing operating leverage opportunities,” and EPS growth is expected in the +30% range.
Rates outperform, price target $42
Guggenheim’s Robert Drbul:
“Revolve is well-positioned to drive continued top-line growth of greater than 20%, with increasing profitability, primarily through Active Customer growth and a thriving portfolio of Owned Brands.”
Revolve has “some of the most attractive growth opportunities across our coverage.”
Growth drivers include:
- Expectation that Revolve will continue to drive strong customer acquisition growth (active customers have doubled since 2015)
- Focus on increasing share of wallet and loyalty through various initiatives, including loyalty programs
- Revolve’s Owned Brands are “highly profitable” and are the company’s “most attractive growth opportunity”
- The company will look to further broaden both its product offering (Men’s, Accessories, etc.) and its international presence.
His price target is $50.
At Barclays, Ross Sandler is the lone pessimist with an equal weight rating and a price target of $32.
“The only thing that gives us temporary pause is the 50%+ premium to the fashion e-commerce peers with similar growth and margin profiles.”
“The company’s profitable-since-inception and methodical-growth approach is a welcome contrast to what we typically see om e-commerce.”
The stock is now trading near the price where trading started.
A Trade for Short Term Bulls
As with the ownership of any stock, buying RVLV could require a significant amount of capital and exposes the investor to standard risks of owning a stock.
To reduce the risks of a trade, an investor could purchase a call option. This allows them to benefit from upside moves in the stock while limiting risk to the amount paid for the options. However, buying a call option can also require a significant amount of capital and includes the risk of a 100% loss.
Whenever an option is bought, the maximum risk is always equal to 100% of the amount of spent to purchase the option. Since options cost significantly less than a stock, the risk in dollar terms will usually be relatively small to own an option.
To further limit the risks of the trade, an investor could use a bull call spread. This strategy consists of buying one call option and selling another at a higher strike price to help pay for the cost of buying the first call. The spread strategy always reduces the risk of an options trade.
This strategy is designed to profit from a gain in the underlying stock’s price but has the benefit of avoiding the large up-front capital outlay and downside risk of outright stock ownership. The potential risks and rewards of this strategy are summarized in the chart below.
Source: The Options Industry Council
Both the potential profit and loss for the bull call spread are limited. The maximum loss is equal to the net premium paid when the trade is opened. The maximum profit is limited to the difference between the strike prices, less the debit paid to put on the position.
This strategy could be especially appealing with high priced stocks where the share price and options premiums are often a significant commitment of capital for smaller investors.
A Specific Trade for RVLV
Every day, we scan the markets looking for trades with low risk and high potential rewards. These trades are available almost every day and we share them with you as we find them. Now, it’s important to remember these are trading opportunities in volatile stocks.
When we find a potential opportunity, we evaluate it with real market data. But because the trades are volatile, the opportunities may differ by the time you read this. To help you evaluate the current opportunity, we show our math and explain the strategy.
For RVLV, the July 19 options allow a trader to gain exposure to the stock.
A July 19 $40 call option can be bought for about $1.85 and the July 19 $45 call could be sold for about $0.65. This trade would cost $1.20 to open, or $120 since each contract covers 100 shares of stock.
The amount paid to enter the trade is the largest possible loss on the trade. This is generally true whenever a trader is creating a debit to enter an options trade. “Creating a debit” means there is a cost to enter the trade. You could create a debit by simply buying puts or calls to open a directional trade.
In this trade, the maximum loss would be equal to the amount spent to open the trade, or $120.
The maximum gain on the trade is equal to the difference in exercise prices less the amount of the premium paid to open the trade.
For this trade in RVLV the maximum gain is $3.80 ($45 – $40= $5; $5 – $1.20 = $3.80). This represents $380 per contract since each contract covers 100 shares.
Most brokers will require minimum trading capital equal to the risk on the trade, or $120 to open this trade.
That is a potential gain of about 216% in RVLV based on the amount risked in the trade. The trade could be closed early if the maximum gain is realized before the options expire.