Crocs, Inc. (NDAQ: CROX) shares fell sharply today after the company announced an 84 percent jump in profits on revenues that nearly doubled on international demand, but reaffirmed a 2008 outlook below Wall Street expectations. Momentum stocks like these trade largely on expectations in addition to physical numbers. Unfortunately, there were problems with both today as the stock sank more than 10 percent mid-day as shareholders consider whether or not the company will be able to keep up its stellar track record of success. So, is Crocs a stock worth a look now or is there more downside?

The first thing to consider is valuation. The valuation of a high-growth company is often set by its expected growth in addition to its actual performance. This is why high-growth companies like Crocs can drop when reporting spectacular results - it depends largely on expected growth rather than actual performance. The reaffirmed 2008 guidance in this case was not what many investors were expecting. This is clearly visible if we take a look at the company’s historic PEG ratio, which shows in plain view that investors were expecting much faster growth. Meanwhile, if we take a look back at the company’s earnings announcements, we see that its earnings surprises are slowly declining and now risk being flat or negative with a reaffirmed guidance.

Crocs’ earnings call also gave some valuable insights into why the firm’s shares dropped so dramatically. Analysts were most concerned about a 27.2 percent rise in inventory build-up during the third quarter. The company ended the fourth quarter with $248.4 million - up $195.3 million from the end of the third quarter. Management defended the build-up by arguing that they have chased demand since inception and felt that the planned build-up was necessary to meet first half forecasted customer demand. However, the carry cost of excess inventory - that is, warehousing and distribution costs - can be steep and may end up costing the company big money if they are wrong during future earnings announcements.

All of that being said, Crocs currently trades at just 10x forward earnings, which is far below that of its peers. The company also has a strong product line and expects to see continued growth through 2008 despite a decline in the U.S. economy through strong international growth that is already showing up in today’s announcement. In the end, Crocs carries a lot of risk with its slowing earnings and large inventory, but the stock is trading at historically cheap levels. In the end, it is clear that growth is slowing but the concern is that management may not realize it and be overbuilding inventory…

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