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.

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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.

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