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This Top Growth Stock Looks Insanely Cheap

It seems like the stock market reaches new all-time highs every week. This trend could easily discourage investors looking to put some money to work, but are worried about elevated valuations.

There's good news. You can find fast growth and a cheap valuation even in today's market. All you have to do is consider buying shares of Crocs (NASDAQ: CROX), the maker of insanely popular foam clogs.

It's the comfy solution to your investing troubles.

Image source: Getty Images.

Strong momentum

You've seen them all over the place. What started as an in-demand shoe for people always on their feet has transformed into a lifestyle brand that emphasizes comfort over anything else -- a trend that the pandemic helped boost. As a result, during each of the last four quarters, Crocs registered accelerating revenue growth. In the second quarter of 2021, sales increased 93% year over year to reach $641 million.

In its fall 2021 "Taking Stock With Teens" survey, analyst firm Piper Sandler highlighted Crocs as a brand gaining popularity among Gen Z consumers. This younger demographic is valuable for any consumer brand because it can lead to lifelong customers. Supporting Crocs' brand relevance is a marketing strategy focused on key partnerships, like the ones with celebrities such as Justin Bieber and Bad Bunny and Spanish luxury fashion house Balenciaga.

Crocs sports a superb gross margin of 61.7% and an excellent operating margin of 30.5% over the last four quarters. That's all the more remarkable given that the average selling price of its footwear products is just $21.84. Selling an affordable product that attracts younger customers puts Crocs in a promising market position.

Strategic initiatives

Crocs' stock has significantly outperformed the S&P 500 over the past one-, three-, and five-year periods. In fact, since October 2016, shares of Crocs are up an incredible 1,440%. But based on management's long-term outlook, the clog maker's market-beating days could be far from over.

Crocs is pursuing the key long-term strategic priorities that management outlined during its recent investor day presentation. By 2026, executives expect Crocs to generate $5 billion in annual sales, which would be more than double the revenue forecast of $2.25 billion for 2021. This implies a robust compound annual growth rate of 17%.

Image source: Getty Images.

In order to achieve this, the business will bet heavily on Asia, a region the leadership team hopes will represent 25% of overall revenue in five years. China, the world's second-largest footwear market, is going to play a huge part in this push. Japan and South Korea are also among Crocs' five most lucrative markets today, so it's obvious just how critical Asia is for the company's ambitions.

What's more, Crocs wants digital revenue to account for half of the total business by 2026, up from 36.4% in the most recent quarter. Generating more direct-to-consumer sales helps to strengthen the brand by relying less on third-party retailers, something that will support those aforementioned margins by cutting out middlemen.

Crocs also relies on product innovation to boost growth, aiming to quadruple sales of sandals by 2026. "Sandals represented 20% of footwear sales for the quarter, versus 23% last year. As we have shared, while we expect clog growth to outpace sandals this year, we anticipate that over the longer-term sandals will grow faster than clogs," CEO Andrew Rees noted on the Q2 earnings call. Sandals represent a massive $30 billion market opportunity today.

Bargain price

You would think that a booming business like Crocs would trade for a lofty valuation, but you'd be wrong. For a forward price-to-earnings ratio of just 15.2, investors can purchase shares of a company exhibiting fast growth with a widely recognized brand that still has a big opportunity in front of it. Even more eye-opening is that Crocs sells for a cheaper valuation than industry peers like Nike, Under Armour, and Adidas.

Investors are getting a rare combination of growth and value by buying shares of Crocs. I think it's time to believe the hype. And if this isn't enough to convince you, seeing more and more of those famous clogs everywhere might persuade you.

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Neil Patel has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Nike, Under Armour (A Shares), and Under Armour (C Shares). The Motley Fool has a disclosure policy.


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