Given all the attention that tech stocks have gotten, particularly those with heavy exposure to the artificial intelligence boom, it's easy for investors to forget that monster investment returns can be had by putting your money into "boring" enterprises. Crocs(NASDAQ: CROX), the maker of popular foam clog slip-ons, is the perfect example.
In the past five years, this magnificent shoe stock has risen an awe-inspiring 451%. For comparison's sake, the S&P 500 has generated a total return of just 104% over the same period.
After such an impressive run, is it still a good idea to buy Crocs shares?
Beating Wall Street estimates
Crocs just reported second-quarter financial results that came in ahead of Wall Street analysts' estimates. Revenue totaled $1.1 billion, up 3.6% year over year. The gain for the Crocs brand, accounting for 82% of company sales, more than offset the HeyDude revenue dip of 17.5%.
Diluted earnings per share rose 11.2%. This continues a long-running streak of top- and bottom-line growth over the past few years. CEO Andrew Rees had this to say about the latest results:
Based on the strength of our second quarter, we are lifting our operating margin and earnings per share outlook for the fiscal year while maintaining our revenue guidance. Our terrific cash flow generation provides us the flexibility to reinvest in our business, pay down debt, and repurchase shares.
Crocs' favorable attributes
One thing that stands out about Crocs is profitability. In the past five years, the company's gross margin has averaged a stellar 55.4%. This is not only better than sportswear leader Nike but even a top consumer electronics brand like Apple. This indicates not only the low cost to produce Crocs shoes but consumers' willingness to pay for them.
The operating margin tells a similar story. It has averaged 22.6% in the last five years. That margin has improved over the years, showcasing economies of scale.
Crocs also possesses long-term growth potential. There's a push to expand overseas. In fact, the brand's international sales jumped 18.7% last quarter, much higher than the 3.0% gain in North America. Crocs wants to make further inroads in China, which is the world's second-largest footwear market.
Why is the stock so cheap?
Despite Crocs shares rising more than fivefold since Aug. 2019, they trade at a bargain-basement valuation. The current price-to-earnings ratio of 10 is less than half the multiple of the overall S&P 500. This doesn't make sense for a consistently profitable and growing enterprise, but I think it all comes down to the brand's strength.
The recent struggles that industry heavyweight Nike is experiencing points to just how difficult it is to consistently satisfy consumers' changing tastes and preferences. Marketing, product innovation, and striking the right distribution balance between direct-to-consumer and wholesale channels should always be a priority.
Perhaps the top fear the market has is that Crocs' popular foam clogs simply fall out of favor with consumers. Given that most of the company's revenue is derived from this single product, it would deal a huge blow to Crocs. The financial performance suggests there hasn't been anything to worry about. However, the market is a forward-looking machine, and the worries are certainly there.
Investors who appreciate and understand this prominent risk factor might still be compelled to buy the stock even after its surge in the past five years. The cheap valuation could be too hard to pass up.
Should you invest $1,000 in Crocs right now?
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Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple and Nike. The Motley Fool recommends Crocs and recommends the following options: long January 2025 $47.50 calls on Nike. The Motley Fool has a disclosure policy.
