Potentially 34% undervalued, should I be watching the boohoo share price?

The boohoo share price has seen a rocky few years, but with signs that the economy is improving, could this be a buying opportunity?

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boohoo (LSE:BOO), the online fashion giant known for its trendy styles and targeted marketing, has experienced a roller-coaster ride in recent years. Once a darling of the stock market, the boohoo share price has plummeted over 20% in the last year alone. But is this a sign of a sinking ship, or a buying opportunity for savvy investors?

What’s going on?

Analysts are divided. While the company has undoubtedly faced challenges, some see reasons to make this a stock well worth watching.

boohoo’s recent woes can be attributed to a confluence of factors. In November 2023, the company issued a profit warning, citing a slowdown in consumer spending and rising costs. The primary demographic, young adults aged 16 to 45, were reportedly feeling the pinch of inflation and were cutting back on discretionary spending like clothing.

Furthermore, the fast-fashion industry itself has seen some other major headwinds in recent years. Consumers are becoming more environmentally conscious and are shifting towards sustainable clothing options, away from fast fashion. Boohoo’s business model, built on mass production of trendy garments at low costs, might not resonate as strongly with this new wave of eco-conscious shoppers.

As a result, the share price has plummeted over 85% in the last five years.

Signs of hope

Despite the current gloom, there are reasons to be cautiously optimistic. Firstly, analysts predict annual earnings growth of a whopping 80% over the coming years. Admittedly, there still aren’t any signs of profit for the foreseeable, but a long-term investor may be rewarded if this trend can continue.

Secondly, the company is adept at using social media and influencer marketing to reach its target audience. In the ever-evolving retail landscape, this could be a massive growth area.

The third, and most interesting factor to me is the potential valuation. A discounted cash flow calculation suggests the firm is about 34% undervalued. Although this isn’t a guarantee, with this much potential, I’d consider some more digging into the balance sheet well worth doing.

At present, debt levels seem to be under control. Also, there is a solid reserve of cash available, but as the sector has seen in the past, such resources can disappear very quickly in the wrong environment.

Risks remain

Before jumping on the bandwagon, it’s important to acknowledge there are still plenty of concerns that have dogged the company in recent years. There have been accusations of poor working conditions in its supply chain. These controversies can damage the firm’s reputation and seriously alienate consumers who value ethical practices.

Moreover, boohoo faces stiff competition from established players like ASOS and emerging rivals like PrettyLittleThing. The online fashion market is crowded, and boohoo will need to innovate and adapt to stay ahead of the curve.

Am I buying?

The potential upside in the boohoo share price is certainly enticing. But it’s important to remember that this is just a calculation, and the stock price could easily go down further.

For long-term investors who believe in the firm’s ability to overcome its challenges and adapt to the changing retail landscape, then the current share price might be an attractive entry point. However, I still don’t have much confidence that these can be resolved any time soon. I’ll be staying well clear for now.

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.

Gordon Best has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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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