Could the 190p Boohoo share price be set to fly back over 260p?

Boohoo Group plc (LON:BOO) and this other online retailer have massive upside potential, but can they deliver? G A Chester gives his view.

| 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.

The Boohoo (LSE: BOO) share price has hovered just below 190p today and is at 187p as I write, 30% below its high of 266p in June last year. Fellow online retailer AO World (LSE: AO) is trading even deeper below its previous peak. It was floated at 285p in February 2014 and has never been higher than a spike to over 400p during the first day of trading. After releasing its half-year results this morning, the shares are currently trading 7% down on the day at 115p. They’re now 60% below the flotation price.

Clearly, both stocks have considerable upside potential for investors today, if they can surpass their previous highs. But can they do so?

AO let’s go-ish

AO World today trumpeted continued revenue growth against “a continuingly tough macro trading environment in [the] UK and Europe.” It reported a 9.9% increase in total revenue to £404m for the six months ended 30 September.

The overall UK major domestic appliances (MDA) market declined but the company said it takes “encouragement that we are at least maintaining market share in this core category in the UK.” Revenue growth of 5.7% in the UK to £335m came from new non-MDA categories, like audio visual and computing, so you can see the thinking behind the company’s recently announced proposed acquisition of Mobile Phones Direct. In Europe, revenue increased 35% to £69m.

AO’s adjusted earnings before interest, tax, depreciation and amortisation (EBITDA) was a loss of £5.4m at the group level. The UK posted a positive £6.9m (down from £7.4m in the same period last year), while Europe narrowed its loss to £12.3m from £13.7m. The group cash outflow for the period was £14.9m, leaving it with net cash of £23.9m.

Premium rating unmerited?

AO appears to be well managed, but as a low-margin business I’ve always been bearish, seeing it as grossly overvalued. That the company says its newer categories are dilutive to gross margin doesn’t help persuade me that the fall in its share price has made the valuation more attractive.

I can see downgrades to analysts’ forecasts for fiscal 2019 and 2020 after today’s numbers, which makes the existing 92 times forecast 2020 earnings even less attractive. As such, I can’t see the AO share price returning to its former highs any time soon. Indeed, I continue to see it as a stock to avoid.

Premium rating merited?

Boohoo is not only growing its revenue much faster than AO (50% versus 9.9%), but the fast fashion operator also has decent margins and is generating strong (and rising) bottom-line profit and cash flows. While the net cash on AO’s balance sheet is being eroded, Boohoo’s is rising. It had £156m at its half-year ended 31 August, compared with £119m on the same date the prior year.

I see a lot to like about Boohoo. The growth numbers are testament to great management, which includes strong sourcing and shrewd acquisitions (the PrettyLittleThing and Nasty Gal brands), but also to structural trends in fashion. More and more people are shopping online. They’re demanding value. And they want not just fast fashion but faster fashion. These trends play right into Boohoo’s strengths.

The shares can be bought today on 47 times current-year forecast earnings and 38 times next year’s (compared with AO’s 92 times). I believe Boohoo’s long-term growth prospects merit a premium rating and I rate the stock a ‘buy’.

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.

G A Chester has no position in any of the shares mentioned. The Motley Fool UK has recommended boohoo group. 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

Investing Articles

How I’d aim to earn £16,100 in passive income a year by investing £20k in a Stocks and Shares ISA

Harvey Jones is building a portfolio of high-yielding FTSE 100 dividend stocks that should give him a high and rising…

Read more »

Investing Articles

Down 8% in a month! The BP share price is screaming ‘buy, buy, buy’ at me right now 

When crude oil falls, the BP share price invariably follows. Harvey Jones is wondering whether this is the right point…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

Could the 9.8% M&G dividend yield get even bigger?

Christopher Ruane reckons that, although the M&G dividend yield is already close to a double-digit percentage, it could get better…

Read more »

Investing Articles

How much passive income could I earn by putting £380 a month into a Stocks and Shares ISA?

Christopher Ruane explains how he'd aim to turn a Stocks and Shares ISA into four-figure passive income streams each year.

Read more »

Investor looking at stock graph on a tablet with their finger hovering over the Buy button
Investing Articles

2 passive income stocks I’m buying before an interest rate cut

With the market expecting interest rates to fall in August, time might be running out for investors looking to buy…

Read more »

Investing Articles

If I’d bought Rolls-Royce shares a year ago, here’s what I’d have now

Rolls-Royce shares have been the big FTSE 100 success story of the past 12 months and more. And there's still…

Read more »

Young female analyst working at her desk in the office
Investing Articles

If the Dow’s heading for 60,000 by 2030, can the FTSE 100 index hit 12,000?

Strategist Ed Yardeni predicts a 50% rise for America’s Dow Jones Industrial Average over six years. Can the FTSE 100…

Read more »

Investing Articles

Is the National Grid share price a once-in-a-decade opportunity?

The National Grid share price looks like a bargain. But there’s much more for investors to think about than a…

Read more »