Investors have turned their backs on the company despite its underlying improving performance. Indeed, at the beginning of January, the online fashion retailer upgraded its full-year growth forecasts for the second time in just four months and is now expecting sales growth of around 90% for the year, significantly ahead of the initial 60% year-on-year growth target.
So, as the market continues to under-appreciate the underlying business’s explosive growth, is the Boohoo.com share price the bargain of the year?
Must-buy or avoid?
Even though Boohoo is expecting to report a near doubling of revenues for fiscal 2018, City analysts are only expecting earnings growth of 29% for the period as the firm ramps up marketing spend to attract customers.
Unfortunately, this rate of growth does not really justify its high valuation. The stock currently trades at a forward P/E of 52 and when earnings growth of 29% is factored-in, this gives a PEG ratio of 1.8. A ratio of less than one implies the stock offers growth at a reasonable price. A ratio above that suggests the shares are overpriced.
On a PEG basis alone then, Boohoo looks expensive. That being said, the company has a history of outperforming City and even its own expectations so I’m hesitant to take the current forecasts at face value.
Still, despite Boohoo’s history of beating expectations, the company has acknowledged that trading is becoming tougher. Management recently downgraded the group’s core profit margin forecast blaming investments in pricing, promotion and marketing, and it would appear that some investors are concerned Boohoo’s best days are now behind the business.
In my opinion, these investments in growth should pay off over the long term. For example, the group’s investment in automating its only UK warehouse should speed up deliveries and improve profit margins, which will, in turn, allow Boohoo to maintain its competitive pricing edge over peers.
Meanwhile, the group is spending heavily on the development of new brands PrettyLittleThing and Nasty Gal, the latter of which was still lossmaking as far as its most recent figures were concerned. For its fiscal year ending February 2016, Nasty Gal made a net loss of $21m on revenues of $77.1m. While these figures tell us little about current trading as they are two years old, Boohoo’s latest update shows Nasty Gal generated only £11.9m ($16.7m) for the four months to 31 December or around $67m annualised.
Nonetheless, until management can prove that these hefty investments have been worth the money, I believe they will continue to hang over the Boohoo.com share price.
Time will tell
Considering the above, the share price might not be the bargain of the year. The shares do look expensive, and the company needs to prove that it is worth this valuation. The preliminary results set to be released on 25 April should offer investors some more insight into Boohoo’s outlook and position in the UK’s increasingly competitive retail market.
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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has recommended boohoo.com. 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.