The performance of the Boohoo (LSE: BOO) share price over the past 12 months has been incredibly disappointing. Since the beginning of September last year, the stock’s fallen 12%.
Over the same timeframe, the FTSE All-Share Index returned 24%, excluding dividends. This means Boohoo has underperformed the market by 36% over the past year.
These figures might appear disappointing at first, but they need to be put into perspective. Over the past five years, the Boohoo share price has returned nearly 200% compared to the market’s 12%. So long-term investors have been well rewarded for sticking with the group in the past.
However, the company’s recent performance suggests investors have been shunning the business recently. So what’s going on?
Boohoo share price headwinds
I think there’s a combination of reasons why investors have been selling shares in the fast-fashion company in recent weeks. First of all, during the pandemic, Boohoo’s growth exploded as consumers flocked to the company’s online offer when brick-and-mortar retail stores were closed.
Overall, group revenues increased 40% last year on the back of this growth. As customers flocked to the firm’s websites, its stock price surged, reaching an all-time high of 413p in June last year.
Unfortunately, this growth has moderated in 2021. It seems as if investors are now factoring in this slower growth rate into their calculations.
At the same time, the company’s fighting a lawsuit in the US regarding its product pricing. And here in the UK, it’s been repeatedly criticised for its working practices.
Considering all of these challenges, I don’t believe the Boohoo share price deserves the high multiple the shares have historically commanded. It would appear the market agrees.
As the stock’s fallen, so has the company’s valuation. At the time of writing, the stock’s dealing at a forward price-to-earnings (P/E) multiple of 26. That is nearly half of its five-year average.
I think the Boohoo share price may continue to decline in the near term for the reasons outlined above. However, if the company’s profits continue to increase, this means the stock will only become cheaper.
Sooner or later, the valuation will fall to a level that doesn’t justify the company’s growth.
At this point, I’d buy the stock. I plan to avoid the company until we reach this level. I believe the current valuation doesn’t compensate investors for the number of challenges the enterprise is currently having to deal with.
Still, overall, I think the company has a great business model. Its more recent strategy of buying failing brands and then using its online experience to increase sales and reduce costs has worked incredibly well. I see no reason why it can’t continue to do so.
That’s why I’d buy the stock, but I’m happy to wait for its valuation to fall before taking a position.
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Rupert Hargreaves 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.