The past six months have been a windfall for Ralph Lauren’s shareholders. The company’s stock price has jumped 40%, hitting $312.58 per share. This was partly due to its solid quarterly results, and the run-up might have investors contemplating their next move.

Is there a buying opportunity in Ralph Lauren, or does it present a risk to your portfolio? See what our analysts have to say in our full research report, it’s free.

Why Is Ralph Lauren Not Exciting?

Despite the momentum, we're swiping left on Ralph Lauren for now. Here are three reasons we avoid RL 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 Apparel and Accessories companies. This metric excludes currency movements, which are outside of Ralph Lauren’s control and are not indicative of underlying demand.

Over the last two years, Ralph Lauren’s constant currency revenue averaged 6.3% 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 Revenue Growth Is Slim

Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.

Over the next 12 months, sell-side analysts expect Ralph Lauren’s revenue to rise by 5.3%, close to its 6.9% annualized growth for the past five years. This projection doesn't excite us and implies its newer products and services will not accelerate its top-line performance yet.

3. Cash Flow Margin Set to Decline

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

Over the next year, analysts predict Ralph Lauren’s cash conversion will slightly fall. Their consensus estimates imply its free cash flow margin of 10.5% for the last 12 months will decrease to 11.5%.

Final Judgment

Ralph Lauren isn’t a terrible business, but it doesn’t pass our bar. Following the recent surge, the stock trades at 21.9× forward P/E (or $312.58 per share). This valuation multiple is fair, but we don’t have much faith in the company. We're pretty confident there are superior stocks to buy right now. We’d recommend looking at one of our top software and edge computing picks.

Stocks We Would Buy Instead of Ralph Lauren

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