One Top AI Stock Down 37% That You'll Regret Not Buying on the Dip | The Motley Fool (2024)

It's earnings season again, and many stocks are tumbling following weak quarterly results. The S&P 500 has sustained most of its gains so far this year and remains up 7%.

The Federal Reserve is in a tight spot as it tries to combat inflation through raising interest rates while, at the same time, not suppressing the economy so much that it causes a recession. Many economic experts are predicting a recession at some point this year, and retail outfits are feeling the pinch of inflation and slower spending. That's been leading to slower growth for some, lower sales for others, and pressured profits for most.

It makes sense that share prices would come down as the market grapples with the latest set of earnings that don't support existing valuations. However, driven by fear, the market almost always overcorrects and drags down stock prices beyond what's warranted by the state of the underlying businesses. As a result, valuations often fall into dirt-cheap territory when share prices fall faster and further than underlying business metrics, including revenue and profits. This could lead to exciting opportunities for investing in companies that have incredible potential down the road.

Revolve Group (RVLV -4.22%) is down a substantial 37% over the past year. But we can expect a lot from it, so this is an opportunity you won't want to miss.

Fashion and artificial intelligence meet

Artificial intelligence (AI) has been on many people's radars for a long time, but it absolutely exploded with the launch of ChatGPT. The public is fascinated by what generative AI models can do and how well they can replicate real human results.

But many under-the-radar companies have quietly been using AI and machine learning for decades to predict human behavior and create algorithms to give them what they want. Consider how Amazon provides search results or recommends similar products to those you've already viewed or purchased.

Revolve is one company that has seen wild success using predictive AI models. It's been at it for 20 years, and over that time, it has amassed millions of data points that now give it the capabilities to know exactly what trends are upcoming and to offer precise product recommendations. Since it's completely digital, it can quickly and easily change up its merchandise based on how trends are moving.

Recently, Revolve launched what it says is the first-ever AI billboard campaign targeting shoppers on their way to several festivals, such as the music and arts festival Coachella, as well as its own Revolve festival. It also created its own capsule fashion line generated from the campaign designs.

AI, fashion, and community

Another way Revolve is unique from other fashion companies is in its focus on creating a community through third-party influencer marketing -- fashion bloggers can sign up as influencers and link back to Revolve. This has been a crucial part of the company's marketing plan, as it relies heavily on celebrity partnerships. The company drew A-list names to its festival, with Kylie Jenner headlining the event; Jennifer Lopez is designing a collection with Revolve as well. This reinforces its premium branding, which is a major part of its business model.

Revolve is using AI as part of this strategy, too. It launched AI fashion week to inspire fashion designers to use AI in their designs, and it's taking submissions from readers for their own AI-created merchandise. It will feature design capsules from three winners on the Revolve site, furthering its successful community-based marketing structure.

Feeling the pressure of inflation

Revolve's sales exploded as shoppers discovered its products early in the pandemic. But now, as the company faces tough comps and economic pressure, growth is dwindling.

Sales declined 1% in the 2023 first quarter, and net income dropped 37%. However, it stayed on the positive side of net profitability.

Despite those disappointing results, there were plenty of good updates in the quarter. Active customers and orders placed increased both year over year and sequentially, and average order value remained stable.

Revolve also generated $47 million in cash and has no debt.

Is it time to buy Revolve stock?

At the current price, Revolve stock trades at 26 times trailing-12-month earnings. That's cheap for a growth stock, but Revolve doesn't look much like a growth stock right now. Management gave the depressing update that April sales were down 7% from last year.

RVLV PE Ratio data by YCharts.

The company made important progress in decreasing inventory, and management expects a sequential improvement in expense management over the rest of the year.

Revolve displays many signs of a healthy business with massive market opportunities. The near term is likely to stay harsh, and the stock won't bounce back right away. But if you have a long-term horizon, Revolve stock should rebound big -- at some point -- and this is an opportunity to buy.