Shares in fast-growing online fashion retailer Boohoo (LSE: BOO) have taken a beating recently. Back in early July, the share price was above 300p. Today, however, it’s near 200p.
So, what’s going on with Boohoo shares? And has the recent share price weakness created a buying opportunity for a long-term investor like myself?
Why Boohoo’s share price has tanked
There are a number of reasons Boohoo’s share price has fallen recently, in my view.
One is that there were a few ‘nasties’ in the company’s recent first-half results, which were posted in late September. The main thing that spooked investors here was that near-term profit margin guidance was lowered. EBITDA margins for the full year ending 28 February 2022 are now expected to be 9%-9.5%. Previous guidance was 9.5%-10%.
Another reason the share price has pulled back is that analysts have been downgrading their earnings estimates for the company, and also reducing their share price targets. Over the last month, the consensus earnings per share forecast for the year to February 2022 has fallen by 1.54p to 8.85p. Meanwhile, on 11 October, analysts at HSBC cut their Boohoo share price target from 585p to 405p. This kind of broker activity can have a negative impact on a company’s shares.
A third reason the shares have fallen is that the market is becoming more concerned about competition. Some investors are concerned that Chinese online fashion retailer Shein could capture market share. It adds 5,000 new styles to its website every day and has the ability to undercut rivals’ prices. In the US, Shein is very popular with teenagers.
Finally, investors tend to be steering clear of companies that are highly exposed to inflation (that is, higher input costs) and supply chain challenges right now. Boohoo, as a clothing manufacturer, is exposed to both.
Is now the time to buy Boohoo shares?
As for whether the recent share price has created a buying opportunity for me, I believe it has.
Sure, there are plenty of risks here. I think inflation and supply chain challenges are a genuine concern in the short term. Both could hit profits.
Meanwhile, competition levels are rising. It’s not just Shein that Boohoo has to worry about. Missguided, I Saw It First, and In The Style are some other companies the group is up against.
However, my view is that these risks are now baked in to the share price.
If we look at the earnings forecasts for the year ending 28 February 2023 (the next financial year), the consensus estimate is 11.5p per share. So that puts Boohoo on a forward-looking price-to-earnings (P/E) ratio of just 17.2. To my mind, that’s incredibly low given the speed at which the company is growing (three-year revenue growth of 200%), and the power of its brands.
At that low valuation, I’d be happy to buy Boohoo shares for my investment portfolio today.
Edward Sheldon owns shares of boohoo group. The Motley Fool UK has recommended HSBC Holdings and 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.