There are many ways to invest in the stock market, but one of the biggest debates is about value stocks versus growth stocks. The old camp attempts to uncover assets that are selling at a discount to their intrinsic values, patiently waiting for the gap to close and make a profit. The latter group only looks for assets, often selling at expensive multiples, that show tremendous sales growth.
Growth stocks have generally been under pressure due to rising interest rates, but Crocodile (CROX -5.29%) is one of those companies that seems extremely attractive right now. This is my best growth stock to buy in 2022.
Another strong quarter
In the three months that ended June 30, Crocs grew its sales 50.5% year over year to $964.6 million. Excluding the acquisition of HeyDude, Crocs’ core brand, saw revenue jump 14.3%, which is still impressive given the challenging macro environment. And according to CEO Andrew Rees, “HeyDude continues to exceed our expectations and we now expect nearly $1 billion in pro forma revenue this year.”
What has made Crocs a special company in recent years is its exceptional profitability. From 2017 to 2021, the company operating margin increased sharply, from 2.1% to 29.5%. And even with headwinds like the strong US dollar (which makes revenue earned overseas worth less when repatriated) and higher logistics costs, the operating margin in the last quarter was still by 29.3%.
But $501.5 million was tied up in inventory as of June 30. This equates to approximately 11% of Crocs’ total market capitalization. Of course, this issue is not specific to the Crocs business. Many other retailers are facing the same consequences of an inventory glut after stocking up earlier in the year. Fortunately, Crocs continues to expand its product line at a rapid pace, a sign that demand remains very strong.
Crocs is ready for long-term growth
During the earnings call, the management team lowered financial advice for the current year, now expecting sales to rise between 10% and 13% for the main brand Crocs, compared to a forecast of more than 20% in the previous three months. And adjusted operating margin is expected to be 26.5% (mid-term) for the full year, slightly compressing from the second quarter due to integration costs related to the purchase of HeyDude.
Despite the challenging environment the company may have to navigate in the second half of 2022, the longer-term outlook is still impressive. By 2026, executives expect annual sales to exceed $6 billion and free cash flow to be at least $1 billion per year. Goals that management will pursue include investing in expanding digital penetration, quadrupling sandals sales and intense focus on generating 25% of revenue in Asia, with a particular focus on China, the second global footwear market.
It’s not hard to see that if Crocs is on course to meet these financial goals over the next few years, the stock is poised to continue to outperform. Over the past five years, stocks have soared more than 700%, crushing the performance of the broader market.
Looking at the valuation
Although shares of Crocs have jumped 42% in the past month, they are still trading at an incredibly attractive price. price/earnings ratio under 9 years old. Not only is it significantly cheaper than Crocs’ three-year rating, it’s also significantly lower than industry heavyweights. Nike, Adidasand under protection.
Owning shares of Crocs is certainly not without risks, particularly regarding the potential for short-term demand declines in a record macro inflationary environment. But if investors can zoom out and keep their eyes on the next few years, the stock’s valuation today looks like an absolute steal given the massive growth management expects. And that’s why it’s a growth stock to buy this year.
Neil Patel has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nike and Under Armor (C Shares). The Motley Fool recommends Crocs and Under Armor (A shares). The Motley Fool has a disclosure policy.