Over the last six months, Crocs’s shares have sunk to $85.67, producing a disappointing 19.4% loss - a stark contrast to the S&P 500’s 10.1% gain. This might have investors contemplating their next move.
Is now the time to buy Crocs, or should you be careful about including it in your portfolio? See what our analysts have to say in our full research report, it’s free for active Edge members.
Why Do We Think Crocs Will Underperform?
Despite the more favorable entry price, we're cautious about Crocs. Here are three reasons we avoid CROX and a stock we'd rather own.
1. Weak Constant Currency Growth Points to Soft Demand
In addition to reported revenue, constant currency revenue is a useful data point for analyzing Footwear companies. This metric excludes currency movements, which are outside of Crocs’s control and are not indicative of underlying demand.
Over the last two years, Crocs’s constant currency revenue averaged 2% year-on-year growth. This performance was underwhelming and suggests it might have to lower prices or invest in product improvements to accelerate growth, factors that can hinder near-term profitability. 
2. Projected Free Cash Flow Gains to Pump Profits
If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.
Over the next year, analysts predict Crocs’s cash conversion will slightly improve. Their consensus estimates imply its free cash flow margin of 17.6% for the last 12 months will increase to 17.8%, giving it more flexibility for investments, share buybacks, and dividends.
3. New Investments Fail to Bear Fruit as ROIC Declines
ROIC, or return on invested capital, is a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).
We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Over the last few years, Crocs’s ROIC has unfortunately decreased significantly. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.
Final Judgment
Crocs doesn’t pass our quality test. After the recent drawdown, the stock trades at 7.5× forward P/E (or $85.67 per share). While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are more exciting stocks to buy at the moment. Let us point you toward the Amazon and PayPal of Latin America.
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