Why Investors Shouldn't Be Surprised By Revolve Group, Inc.'s (NYSE:RVLV) 38% Share Price Surge

Despite an already strong run, Revolve Group, Inc. (NYSE:RVLV) shares have been powering on, with a gain of 38% in the last thirty days. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 20% over that time.

Following the firm bounce in price, Revolve Group's price-to-earnings (or "P/E") ratio of 54.1x might make it look like a strong sell right now compared to the market in the United States, where around half of the companies have P/E ratios below 16x and even P/E's below 9x are quite common. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so lofty.

With earnings that are retreating more than the market's of late, Revolve Group has been very sluggish. It might be that many expect the dismal earnings performance to recover substantially, which has kept the P/E from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for Revolve Group

Keen to find out how analysts think Revolve Group's future stacks up against the industry? In that case, our free report is a great place to start.

How Is Revolve Group's Growth Trending?

Revolve Group's P/E ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the market.

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 52%. As a result, earnings from three years ago have also fallen 51% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Turning to the outlook, the next three years should generate growth of 40% per annum as estimated by the analysts watching the company. Meanwhile, the rest of the market is forecast to only expand by 11% per year, which is noticeably less attractive.

With this information, we can see why Revolve Group is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Bottom Line On Revolve Group's P/E

Shares in Revolve Group have built up some good momentum lately, which has really inflated its P/E. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that Revolve Group maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. It's hard to see the share price falling strongly in the near future under these circumstances.

We don't want to rain on the parade too much, but we did also find 1 warning sign for Revolve Group that you need to be mindful of.

If you're unsure about the strength of Revolve Group's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.