Is the share price ridiculously low, or should you buy this stock instead?

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Online fashion retailer  (LSE: BOO) has seen its shares slip around 40% since peaking in September 2017. The valuation came down, but is the stock a compelling ‘buy’ right now or have we missed the boat?

During the stock’s rise of almost 600% from early 2016 to the autumn of 2017, the price-to-earnings (P/E) ratio climbed as high as about 70. For the trading year to February 2017, the firm posted earnings growth close to 100%, so for a while, the valuation looked justified. But since then, the growth rate has eased. City analysts predict 25% for the current trading year to February 2019 and 27% for the year after that. So the current forward P/E rating running close to 34 looks more in-tune with the growth rate – a ‘fair’ valuation and not, as the headline asks, ‘ridiculously low’.

A pedestrian outlook with risk?

I reckon the best we can hope for now is for the share price to track the ongoing rate of growth, but it could adjust to sit on, above or below, the figures posted by the firm based on investors’ expectations. The days of meteoric share-price rises and dizzying valuations seem to be over for Boohoo, and I think investing in the firm now could lead to a more pedestrian outcome than we are used to. There’s also a fair amount of risk. If future earnings figures disappoint for any reason, the share price will likely continue its journey south.

Stocks usually demonstrate their most rapid rises in the early stages of a growth story, so if we want fast-rising shares we need to look at companies with growth potential that is just emerging, and I think UK-based Sumo Group  (LSE: SUMO) is worth your attention. The company provides development services to the video games and entertainment industries and only arrived on the stock market in December 2017.

Today’s full-year results are full of one-offs due to flotation costs, but the underlying figures are encouraging. Adjusted revenue rose 40% compared to the year before, to reach almost £29m, and adjusted profit before tax lifted 42% to £7.5m. There’s no dividend yet, but I see that as a good thing with growth companies because it suggests that the directors see plenty of potential to plough the firm’s cash inflow back into the business to finance further growth. City analysts’ forecasts are robust. They expect earnings to grow 24% in 2018 and 32% in 2019.

Tapping into growth markets

The directors reckon the firm’s scale, management systems, technology and creative solutions provide a competitive advantage allowing Sumo to provide “flexible co-development and full end-to-end solutions for publishers and other developers.” They said that the company operates a lower-risk contracting model via long-term contracts, which “generally have milestone payments.”

Sumo operates from studios in Britain, India and Canada, and the directors see great potential for growth in the video games industry because of strong demand in China and South America. There’s been a strong start to the current year with full-year expectations “slightly ahead of consensus market forecasts.” Sumo strikes me as an interesting addition to the stock market scene and one to keep a close eye on.

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Kevin Godbold has no position in any of the shares mentioned. The Motley Fool UK has recommended 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.