Crocs has followed the market’s trajectory closely, rising in tandem with the S&P 500 over the past six months. The stock has climbed by 6.8% to $109.40 per share while the index has gained 5.8%.

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.

Why Is Crocs Not Exciting?

We're cautious about Crocs. Here are three reasons why we avoid CROX and a stock we'd rather own.

1. Weak Constant Currency Growth Points to Soft Demand

Investors interested in Footwear companies should track constant currency revenue in addition to reported revenue. 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 3.9% 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. Cash Flow Margin Set to Decline

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 fall. Their consensus estimates imply its free cash flow margin of 21.6% for the last 12 months will decrease to 18.3%.

3. New Investments Fail to Bear Fruit as ROIC Declines

A company’s ROIC, or return on invested capital, shows how much operating profit it makes compared 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. Unfortunately, Crocs’s ROIC has decreased significantly over the last few years. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.

Final Judgment

Crocs isn’t a terrible business, but it doesn’t pass our bar. That said, the stock currently trades at 8.6× forward P/E (or $109.40 per share). While this valuation is optically cheap, the potential downside is big given its shaky fundamentals. We're fairly confident there are better stocks to buy right now. We’d recommend looking at a top digital advertising platform riding the creator economy.

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