The Boohoo (LSE: BOO) share price has outperformed the market over the past five years. The stock has added 585% since May 2016, compared to a return of 19% for the FTSE All-Share index over the same period.
However, over the past few months, the company has started to lag the market. Indeed, year-to-date Boohoo shares have declined nearly 5%. On the other hand, the FTSE All-Share has added 7%. That’s underperformance of 12% for the year so far.
The question is, should I make the most of this decline and snap up some shares of the fast-fashion business for my portfolio today?
Boohoo share price on offer?
Over the past five years, Boohoo has taken the UK fashion market by storm. The company’s sales have exploded as management has pursued an aggressive growth strategy. The firm has spent tens of millions on marketing and has very low costs. This means it can reinvest more profit than traditional bricks-and-mortar brands, driving a virtuous cycle.
After years of knock-out growth, it now looks as if the business is starting to mature. According to the company’s latest set of full-year results, revenue growth for the current year is expected to fall to ‘only’ around 25%, below the 41% increase in the year to February 2021.
These figures are, in a word, disappointing. The market has got used to the company’s explosive growth, and Boohoo has recently been snapping up new brands to bolster its customer offering.
Newly acquired brands include Burton, Wallis and Debenhams. These brands are expected to deliver approximately five percentage points of the group’s overall growth for the year. That implies without these acquisitions, organic growth would be around 20%.
Valuation concerns
This sort of growth would be enough to send shares in most companies skyrocketing. However, there’s already a lot of expectation baked in to the Boohoo share price. As a result, the stock is trading at a price-to-earnings (P/E) multiple of 54.2, which is incredibly high.
Even after factoring in the company’s growth, the stock is trading at a PEG ratio of 1.3. A ratio below 1 indicates the investment offers growth at a reasonable price and is therefore undervalued compared to its growth potential.
Still, the company has outperformed its own growth targets in the past. So, I wouldn’t rule out the same happening again. However, in the past, Boohoo has been a market leader. Today competitors are catching up, which could be one reason why its growth has slowed so substantially. If this trend continues, the slower growth rate could be the new normal for the fast-fashion business, which would have a detrimental impact on the Boohoo share price.
After taking all of the above into account, I’m not willing to buy Boohoo shares today. The company is still growing at a double-digit rate, and there’s a chance it could outperform expectations for the year. But its valuation does not leave much room for error. Another disappointment could lead to a re-rating of the shares to a lower multiple.
