Revolve Group, Inc.'s (NYSE:RVLV) 30% Price Boost Is Out Of Tune With Earnings

Revolve Group, Inc. (NYSE:RVLV) shares have had a really impressive month, gaining 30% after a shaky period beforehand. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 28% over that time.

After such a large jump in price, given close to half the companies in the United States have price-to-earnings ratios (or "P/E's") below 18x, you may consider Revolve Group as a stock to avoid entirely with its 33.4x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

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With earnings growth that's superior to most other companies of late, Revolve Group has been doing relatively well. The P/E is probably high because investors think this strong earnings performance will continue. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for Revolve Group

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What Are Growth Metrics Telling Us About The High P/E?

In order to justify its P/E ratio, Revolve Group would need to produce outstanding growth well in excess of the market.

Retrospectively, the last year delivered an exceptional 36% gain to the company's bottom line. Despite this strong recent growth, it's still struggling to catch up as its three-year EPS frustratingly shrank by 29% overall. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Turning to the outlook, the next year should generate growth of 4.3% as estimated by the analysts watching the company. That's shaping up to be materially lower than the 16% growth forecast for the broader market.

In light of this, it's alarming that Revolve Group's P/E sits above the majority of other companies. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as this level of earnings growth is likely to weigh heavily on the share price eventually.

What We Can Learn From Revolve Group's P/E?

The strong share price surge has got Revolve Group's P/E rushing to great heights as well. Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that Revolve Group currently trades on a much higher than expected P/E since its forecast growth is lower than the wider market. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

The company's balance sheet is another key area for risk analysis. You can assess many of the main risks through our free balance sheet analysis for Revolve Group with six simple checks.

Of course, you might also be able to find a better stock than Revolve Group. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.