Is the Boohoo share price seriously undervalued?

The Boohoo share price looks cheap compared to its trading history, but the company’s fundamentals are deteriorating, says this Fool.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

The Boohoo (LSE: BOO) share price has faced significant selling pressure over the past year. The stock is currently changing hands at just under 90p, slightly off the multi-year low of around 70p printed at the beginning of March.

Following this performance, the stock looks cheap, compared to its trading history. Indeed, back at the end of June 2020, shares in the online fast-fashion retailer were trading at more than 400p.

Considering this performance, I have been wondering if I should add the stock to my portfolio. As a contrarian value investor, I am always on the lookout for undervalued opportunities. The Boohoo share price looks like an undervalued opportunity, but do the fundamentals stack up?

Boohoo share price valuation

The company’s performance was nothing short of outstanding between fiscal 2016 and 2021. Group net profit increased at a compound annual rate of 50%. Considering this growth, it was no surprise that the market was willing to pay a high price to buy into the expansion.

Between 2016 and 2019, the stock traded at an average price-to-earnings (P/E) ratio of around 80. While this might look expensive, compared to the company’s overall growth, it was not that outlandish.

However, recently Boohoo’s growth has slowed. Even though sales continue to expand, rising costs will hit profitability in its current financial year. Analysts have pencilled in a decline of 35% for the group’s earnings this year. I think this is the main reason why the market has re-rated the Boohoo share price lower over the past couple of months.

At the time of writing, the stock is trading at a forward P/E multiple of 19. That looks quite expensive for a company that is expected to report a 35% decline in earnings. Put simply, it seems as if the story has changed here.

The story has changed

The company is no longer a fast-growing tech story. Instead, it has become a retailer struggling with rising costs.

It seems likely this trend will continue. Cost pressures across the retail industry are only becoming more pressing. The cost of living prices could also hammer consumer spending power. This could have a significant impact on the company’s sales. These are some of the biggest challenges the group is going to have to deal with over the next couple of years.

Considering these issues, I do not think that the Boohoo share price looks particularly undervalued at current levels.

I think the stock reflects all of the headwinds the corporation has to deal with. The value of the shares could remain depressed until growth returns. And with that being the case, I am not going to add the stock to my portfolio.

I would rather wait on the sidelines and see how the company’s growth story develops over the next couple of years.

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.

More on Investing Articles

Illustration of flames over a black background
Investing Articles

2 red-hot UK growth stocks to consider buying in April

These two growth stocks are performing well, but can they continue to deliver for investors through 2024 and beyond?

Read more »

Charticle

Is JD Sports Fashion one of the FTSE 100’s best value stocks? Here’s what the charts say!

The JD Sports Fashion share price remains a wild ride during the first quarter. Could it be one of the…

Read more »

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »