The Boohoo (LSE: BOO) share price has been gaining momentum recently, climbing almost 12% over the past month. This positive movement seems to have restored some investor confidence in the UK fashion retailer. While this is good news, Boohoo shares are still down 21% year-to-date, and over 70% over the past 12 months. With things seemingly on the up, should I be adding this stock to my portfolio while it’s under 100p? Or should I steer clear of Boohoo? Let’s take a closer look.
Undervalued opportunity
The current Boohoo share price is 93p. At this price, the stock trades on a price-to-earnings (P/E) ratio of just under 20. This might not seem cheap, but I still think the shares may hold some great value, especially when considering the future growth of the company.
As my fellow Fool Rupert Hargreaves points out, Boohoo has seen earnings grow at an average of 46% per year for the past seven years. If we assume the firm can continue to grow at a more conservative 10% for the next 10 years, it would hypothetically report earnings per share of about 15p in 2032. Assuming this, if the stock were to achieve industry average multiples — around 13 for the online fashion retail space — it could be worth 195p. This theoretical growth seems very enticing to me.
Looking at Boohoo’s close competitor H&M, I also see value. H&M trades on of a price-to-sales (P/S) ratio of 1.23, which is over double the Boohoo P/S ratio of 0.6. This further backs up my thesis that Boohoo’s shares may be undervalued.
Headwinds for the Boohoo share price
Although the share price does look cheap, there are a few concerns I have moving forward. The most pressing concern is some of the workers’ rights issues that have surrounded the firm in recent years. For example, in 2020, a Guardian report highlighted workers creating Boohoo garments being paid well below minimum wage. While the firm has recently taken steps to prevent such activity, these scandals have undoubtedly left a stain on the Boohoo brand name.
Another risk that I see affecting the share price in the short-to-medium term is the threat of rising interest rates. Both the US and the UK raised their rates last week to 0.25% and 0.75% respectively. When rates rise, investors tend to dump higher-risk growth stocks such as Boohoo. As the trend towards rising rates continues, the Boohoo share price could slide further.
What I would do now
In my opinion, the current price does look cheap to me, especially considering it’s down over 70% from a year ago. However, if there’s one thing I’ve learned throughout my retail trading career, it’s that facts always trump hypotheses. While the shares might look cheap on paper, the risk of rising inflation and the branding scandals are both concrete factors. Therefore, I won’t be buying any Boohoo shares for my portfolio today.
