The Motley Fool

Boohoo share price: good value or trap?

Online fashion retailer Boohoo’s (LSE: BOO) share price has surged in recent days. After trending down from 225p to 170p between mid-June and mid-September, the stock has suddenly spiked back above 225p on high volume. At the current price, the stock trades on a forward-looking P/E ratio of 58.3 for the year ending 28 February 2019, falling to 47.1 for the following year, using current consensus estimates. Is that a price worth paying or is the high valuation a trap?

High valuation 

In general, I tend to stay away from highly-valued stocks. A P/E ratio in the mid-20s is one thing, but if the ratio is above 50, I’m often a little wary. The main reason for this is that if a stock has a really high P/E ratio and is ‘priced for perfection’, it doesn’t take much for the share price to fall significantly. For example, if a highly-valued stock experiences a period of slower revenue growth or announces earnings that miss expectations, its share price could easily fall 20% or more in the blink of an eye. So, it pays to be cautious with stocks that have super high valuations.

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US$12.3 TRILLION out of thin air…

And if you click here we’ll show you something that could be key to unlocking 5G’s full potential...

Having said that, if a company has an excellent business model and is generating outstanding growth, then a premium valuation can sometimes be justified. And when I look at Boohoo’s business model and the growth that the company is generating right now, it’s hard to ignore the investment case.

Outstanding performance 

For example, for the most recent half-year period, group revenue surged 50% to £395m and the group raised its revenue growth guidance for the full year to 38% to 43%. When you consider that a number of traditional retailers (Debenhams, House of Fraser etc.) are pretty much on life support right now, that’s an outstanding performance. Even more impressive is the performance of acquired brand PrettyLittleThing, which enjoyed top-line growth of a staggering 132% and saw its number of active customers rise 99% on the same period last year. Overall, Boohoo Group’s adjusted earnings per share rose 31% to 1.99p for the period which is a strong performance and suggests that full-year earnings could beat current consensus estimates.

Winning business model

To my mind, these numbers (as well as a three-year average return on equity of 23%) indicate that Boohoo has a winning business model. The company has a very specific target market (16-30 year-olds) and is simply in the right place at the right time to capitalise on the demand for affordable, on-trend clothing from Millennials. Shopping habits have changed dramatically over the last 10 years, and Boohoo appears to be at the forefront of the revolution.

Higher-risk growth play

So, going back to the valuation, I don’t think Boohoo shares should be ruled out just because the P/E ratio is high.

Of course, at that valuation, the stock is no bargain so I wouldn’t advise betting your life savings on it. However, a small position as part of a diversified portfolio could be a good strategy, in my view. That’s how I’m playing the stock myself.

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US $12.3 TRILLION out of thin air…

And if you click here, we’ll show you something that could be key to unlocking 5G’s full potential...

It’s just ONE innovation from a little-known US company that has quietly spent years preparing for this exact moment…

But you need to get in before the crowd catches onto this ‘sleeping giant’.

Click here to learn more.

Edward Sheldon owns shares in Boohoo Group. 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.

Our 6 'Best Buys Now' Shares

The renowned analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.

So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply enter your email address below to discover how you can take advantage of this.

I would like to receive emails from you about product information and offers from The Fool and its business partners. Each of these emails will provide a link to unsubscribe from future emails. More information about how The Fool collects, stores, and handles personal data is available in its Privacy Statement.