Where will the Boohoo share price be in 10 years?

The Boohoo share price looks cheap, says this Fool, who’s taken an in-depth look at the firm’s challenges and opportunities.

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If I had to pick out one investment that seems to be hated more than any other on the London market, the Boohoo (LSE: BOO) share price would be one of my top picks.

Over the past five years, the company has gone from a speculative growth stock to a market darling and then a pariah. 

I have been amazed as the business has fallen from grace even though revenues and profits have jumped. Indeed, since the beginning of 2020, the stock has fallen in value by 64%.

However, between the end of the company’s 2019 and 2021 financial years, revenue increased from £857m to around £1.8bn. At the same time, net profit more than doubled. 

Growing business

Over the past couple of years, the company has also been gobbling up some of its competitors. The failure of brands such as Topshop and Warehouse offered the firm the opportunity to buy peers’ brands at knockdown prices, vastly expanding its range and reinforcing its position in the UK retail market. 

Boohoo has been able to outperform the competition as a business built for the internet age. As rivals have struggled to adapt to the booming e-commerce market, the group was already prepared. It has been able to capitalise on the industry’s growth, thanks to its sizeable investments in fulfilment infrastructure and online architecture. 

But despite the organisation’s competitive advantages and growing size, the Boohoo share price has only continued to trend lower. 

I think this presents an opportunity. Over the long term, a company’s share price should track the performance of the underlying business. This suggests that if Boohoo continues to expand internationally and develop its position in the UK retail market over the next few years, the stock should begin to reflect this growth. 

Boohoo share price challenges

Before I get on to the question of valuation and the company’s growth potential over the next decade, I should first look at some of the reasons why investors have been dumping the stock over the past year. 

In my opinion, the most glaring reason is the company’s association with poor labour practices. Over the past couple of years, the group has faced a barrage of criticism from all angles as evidence has emerged suggesting labour abuses in its supply chain.

No investor wants to be part of a business that has been accused of underpaying its staff. This is especially true of large institutional investors.

As a result, a number of these investors have reduced their positions in the business to try and contain the potential fallout. They certainly do not want to have to explain to their own investors why they are supporting an enterprise receiving so much negative press. 

The corporation has had to deal with plenty of other challenges as well. Analysts have questioned the quality of its corporate governance and the influence its founder, Mahmud Kamani, has over the company. 

Economic headwinds

As well as these issues, some analysts have questioned past deals and whether or not they represented the best outcome for investors. More recently, Boohoo’s bottom line has come under pressure from rising costs and increasing volume of order returns. 

These are the challenges the business has had to deal with over the past couple of years. Concentrating on these issues alone, I can see why some investors might be avoiding the business. 

However, management is making significant strides towards cleaning up its act. It has instigated a full review of its supply chain. Any suppliers that do not meet its enhanced standards have been removed. The corporation has also been investing considerable sums in customer service.

First-hand experience

These investments certainly seem to be paying off. I recently bought some items from the website, and when there was an issue with the order, the company’s customer services team sorted it out and had a new package delivered within 24 hours. 

I cannot speak for all of the company’s customers, but this level of service is impressive. In my experience, other retailers have taken days to sort out issues, which is both time-consuming and annoying. Boohoo’s platform is built for the 21st century and, to me at least, that clearly shows. 

Boohoo share price outlook

Considering the company’s recent initiatives to improve the quality of its supply chain, my experience of using the business, Boohoo’s cash-rich balance sheet history of integrating acquisitions and current valuation, I think this is an excellent opportunity. 

At the time of writing, the stock is changing hands as a forward price-to-earnings (P/E) multiple of 20. This is around 50% above the sector average of approximately 13, suggesting the stock is expensive. 

However, this projection does not take into account any potential growth over the next decade. Suppose the company can achieve earnings growth of 10% per annum for the next 10 years (from the 5.3p projected for fiscal 2022). In this case, it could report earnings per share of 14.3p for 2032. In this scenario, even if the stock can only achieve a sector average multiple, the shares could be worth 186p. 

There is a chance the stock could outperform this target. It has achieved annual earnings growth of 46% on average for the past seven years. Still, there is no guarantee that the company will repeat this performance as we advance. 

The bottom line

Considering one of the above, I think the Boohoo share price currently looks cheap. Even though the company faces multiple headwinds and has had to navigate some significant challenges in the past, I would be happy to add this growth share to my portfolio today, considering its strengths.

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.

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.

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