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3 reasons why the Boohoo share price could keep rising

Image source: Getty Images.

Shares of online fashion group Boohoo.com (LSE: BOO) have risen by more than 600% over the last three years. But over the last 12 months, the Boohoo share price has become more volatile and drifted lower, despite the firm’s continuing growth.

Today’s news is a good example. The company released a strong trading update showing that first-quarter revenue was 52% higher than during the same period last year. Gross margins were up 1% at 55.2%, and full-year profit guidance was confirmed. Net cash rose to £151m, up from £133m at the end of February.

Despite this impressive performance, the shares promptly fell by about 4% when markets opened.

Why do the shares keep falling?

It’s certainly true that Boohoo’s valuation has become quite demanding, on 45 times next year’s forecast earnings.

It’s also true that historic rates of growth probably can’t be maintained. Revenue doubled last year — it’s only expected to increase by 35%-40% this year. However, today’s figures are in line with previous management guidance and confirm that the firm’s multi-brand strategy is working.

Here are three reasons why I believe Boohoo shares could continue to rise.

1. Successful strategy

The company’s multi-brand approach has allowed it to maintain a much stronger rate of growth than would be possible with just one brand. Boohoo-branded sales ‘only’ rose by 12% to £97m during the first quarter. But sales at PrettyLittleThing  rose by 158% to £79.2m, while Nasty Gal sales gained 149% to £7.2m.

This multi-brand approach is complemented by overseas growth. UK revenue rose by 49% to £110.7m during Q1. Sales in the rest of Europe rose by 82% to £22.3m, while USA sales climbed 75% to £31.4m. Although the overseas markets are much larger, sales remain lower than the UK. I think there’s a lot more growth to come from sales abroad.

Finally, despite its rapid expansion, Boohoo.com’s financial performance has remained rock solid. Profit margins are stable and net cash keeps rising, even after spending on growth. I believe this is a very well-run business.

2. Owner-managers are aiming big

Joint chief executives Mahmud Kamani and Carol Kane remain heavily invested in the business, with a combined shareholding of 20% (about £500m). They’re building an infrastructure that’s capable of handling £3bn of global sales each year. That’s three times analysts’ £1bn sales forecast for 2019/20.

The evidence so far suggests to me that profit margins should remain stable as the group grows, so profits could easily triple again. That would leave the stock on a P/E of just 14 at today’s share price.

3. Just look at the competition

Boohoo’s target market of younger shoppers likes to buy online and they like to buy often. They don’t want to visit traditional department stores and high street retailers.

Online rival ASOS is expected to deliver annual sales of £3bn next year. This firm is already larger and more mature than Boohoo, but there’s no sign that its growth is slowing. Earnings per share are expected to rise by 25% this year and by 23% in 2018/19.

The performance of ASOS suggests to me that Boohoo’s £3bn sales target is very realistic.

Why I’d buy

Boohoo shares are expensive. But in my opinion this business is one of the top growth stocks on the UK market. It might be worth paying extra to own a slice of this very successful business.

Capital Gains

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Roland Head has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended ASOS. 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.