Why I’d ditch plummeting Boohoo.com plc for this fast-rising growth star

Even after dropping over 25% in the past half-year, Boohoo.com plc (LON: BOO) still looks expensive compared to this under-the-radar growth star.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Over the past six months the share price of market darling Boohoo.com (LSE: BOO) has plunged by 28%. That comes as investors have had time to digest management’s decision to prioritise revenue growth for new brands over margins as well as the sale of 4.6m shares by co-CEO Carol Kane following half-year results.

And while many investors may view this dip as a buying opportunity — for example, a full 12 of the 14 analysts covering the stock rate it a Buy or Outperform — I still view at as dangerously overpriced, at 61 times forward earnings. For a company that offers low barriers to entry and trades in a notoriously cyclical industry, such brands can fall out of favour just as quickly as they became a hit.

What started the recent sell-off in Boohoo’s shares was management’s guidance back in September for full-year EBITDA margins to fall to around 9-10%, below prior guidance and current period results. The reasons for lower margins was the group’s decision to invest in marketing for its newly- acquired brands, keep prices lower than competitors for the core Boohoo brand, and invest in expanding its distribution arm.

While it’s good to see management investing in the brand’s future, I worry that needing to aggressively keep the cost of its clothing low, while also diversifying into new brands, means we may be looking at a hard ceiling on the group’s profitability. After all, Boohoo primarily competes on price and there are myriad of competitors offering similar merchandise that have found selling £15 dresses online is fairly easy to do.  

This wouldn’t be a problem if it weren’t for the group’s eye-watering valuation. If management can’t substantially increase margins it will have to continue to grow revenue at an astronomical rate if it’s to ever grow into its valuation. And while management has thus far had little problem recording high levels of growth, that will naturally become harder as it grows in size. Furthermore, if investors begin to believe margins will be permanently low, it will only take one or two quarters of slowing top line growth for them to re-evaluate the hefty growth premium they have awarded Boohoo’s share price.

Slow but steady wins the race

A much more interesting growth share in my eyes is healthcare software provider Craneware (LSE: CRW). While the company isn’t cheap, at 41 times forward earnings, it offers investors deep barriers to entry, a proven track record of increasing revenue and margins over time, and a huge growth market in the form of a US healthcare industry desperate to trim costs.

Half-year results released this morning show the group’s growth is continuing at a good clip, with revenue up 16% year-on-year to $31.1m, and adjusted EBITDA up 18% to $9.7m. Thanks to highly-visible recurring revenue, we also have a very good picture of where the company’s going. Over the next three years, a full $179.4m of revenue is already contracted while the group’s order book is at record levels as it wins over new hospital groups and introduces new software to existing clients.

And there’s good scope for profits to continue rising ahead of sales as the benefits of scale roll in. While the company may be valued highly, I reckon these positives — and a huge net cash position — make Craneware one stock I’d own for the long term.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Ian Pierce has no position in any of the shares mentioned. The Motley Fool UK has recommended boohoo.com and Craneware. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Middle-aged Caucasian woman deep in thought while looking out of the window
Investing Articles

Is BT Group one of the FTSE 100’s greatest value shares?

BT's share price looks like a bargain when you look at the P/E ratio and dividend yield. Is it one…

Read more »

Frustrated young white male looking disconsolate while sat on his sofa holding a beer
Investing Articles

The National Grid share price just plunged another 10%. Time to buy?

The National Grid share price is one of the FTSE 100's most stable, and nothing much happens to it? Well,…

Read more »

Young Black woman looking concerned while in front of her laptop
Investing Articles

Up 15% in 3 months, but I still won’t touch Vodafone shares with a bargepole

Harvey Jones has been shunning Vodafone shares for years. The FTSE 100 stock is finally showing signs of life, but…

Read more »

Growth Shares

This UK stock could be like buying Nvidia in 2021

Jon Smith thinks he's missed the boat with Nvidia shares, but flags up a UK stock that has some very…

Read more »

Businesswoman calculating finances in an office
Investing Articles

The FTSE 100’s Intertek delivers a bullish update — can the share price soar?

I’d describe Intertek as a quality business with a decent dividend income, but will the share price shoot the lights…

Read more »

Market Movers

Up another 10% yesterday, how high can the Nvidia share price go?

Jon Smith talks through the latest results but flags up why further gains could be harder to come by for…

Read more »

Investing For Beginners

Down 43% in a year, I think this value stock is primed for a comeback

Jon Smith flags up why a FTSE 250 share has fallen so much in the recent past, but explains why…

Read more »

Young woman working at modern office. Technical price graph and indicator, red and green candlestick chart and stock trading computer screen background.
Investing Articles

Nvidia stock is stupidly expensive. Or is it?

Nvidia stock's up over 2,000% in the past five years. Christopher Ruane explains why it could be wildly overvalued --…

Read more »