With the tech-heavy Nasdaq down 13% this year, growth stocks have slumped in 2022. But the dip could be a good entry point for new investors looking to bet on a rebound in the sector. Let’s explore why Amazon.com ( AMZN 0.34% ) and Revolve Group ( RVLV 1.12% ) could help power a recovery.
With a market cap of almost $1.7 trillion, Amazon.com is already one of the largest companies on Earth. But that doesn’t mean it’s finished growing. Despite macro challenges, its inflation-resistant business model and diversified revenue streams could power continued success.
According to the Bureau of Labor Statistics, the U.S. inflation rate stands at 7.9% as soaring energy costs and supply-chain challenges increase the cost of producing goods and services. But Amazon is at least somewhat shielded from these headwinds.
Higher prices at brick-and-mortar retailers could encourage more consumers to shop online (where there are generally more options). The company also offers Amazon Prime subscriptions, which can help customers save money by offering discounts and free shipping. Amazon’s AWS cloud-computing business (which represents 72% of operating income) provides more diversification outside of retail.
With a forward price-to-earnings (P/E) ratio of 56, Amazon stock is significantly more expensive than pure retail rivals like Walmart or Target, which boast P/Es of 21 and 16, respectively. But the e-commerce giant deserves the premium because of its unique advantages.
2. Revolve Group
Revolve Group is a fashion-focused online retailer that targets millennial and Gen-Z audiences. The company has benefited from the COVID-19 reopening, and its bull run can continue over the long term because of the company’s pioneering social-media-driven marketing strategy.
Revolve sponsors a network of social-media influencers with free clothing and access to exclusive events. In return, the influencers create organic content that promotes Revolve’s brand and clothing to their followers.
This strategy faced massive challenges because of the pandemic, which led to the cancellation of its real-world events such as Revolve Festival in 2021 (part of Coachella). But according to co-CEO Michael Mente, “a year removed from vaccines, it seems like the customer’s ready to go out”.
The company is capitalizing on this pent-up demand through real-world activities such as its Revolve social club — a two-story space in LA featuring shops, food, classes, and panel discussions. The opening was attended by Kim Kardashian, which ties into Revolve’s strategy of associating its brand with influencers with large social-media followings.
Revolve Group’s end goal is to sell clothing, and it’s working. Fourth-quarter net sales soared 70% year over year to $240 million, while net income increased 55% to $29.4 million. With a forward P/E ratio of 39, Revolve’s stock is more expensive than the market average. But the price looks reasonable, considering its rapid growth and unique business strategy.
Don’t give up on growth stocks
It’s no secret that growth stocks are getting pummeled right now. Inflation is soaring, and rising interest rates could make the cost of capital (and business expansion) more expensive.
But top-quality businesses like Amazon.com and Revolve Group probably won’t stay down forever. Their resilient business models and convincing growth strategies could help power a long-term rebound. Investors should take note.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.