I didn’t much like the look of Boohoo (LSE: BOO) shares back at the start of 2015, as I’d seen the meteoric rise and subsequent fall of that earlier star in the online fashion market, ASOS.
ASOS shares more than trebled several times, but each big climb was followed by a disappointing slump again, and the share price is still way below its early 2014 peak.
But though Boohoo shares didn’t soar quite as dramatically, they did gain 160% by mid-2017. Unfortunately, though, the shares haven’t maintained those early levels, and have since dropped by almost 30%. But with sentiment being low at the moment, I can’t help wondering if it might be a canny move to buy.
Now, I think the chances of the the Boohoo share price tripling before December 2019 is out are pretty slim. But the real question is whether those who take advantage of the slump in the price that has happened since mid-2017 through buying now will be setting themselves up for that level of profit in the slightly longer future.
It seems clear to me that there are plenty who think, or at least hope, that will happen. The current share price valuation is one key indicator in itself.
When a new growth share prospect emerges, investors with no apparent concern for actual valuation will jump on the bandwagon and push the price way on up. Then what almost always happens is that something causes a slight jolt in confidence — it’s often a set of figures that fail to beat forecasts, but it can be as simple as early investors deciding to take a profit.
The share price then crashes, and often goes through a series of ups and downs as fresh waves of investors like the look of it. Both ASOS and Boohoo share prices have gone through those phases, and are hopefully now under the control of more rational folk who actually do understand the valuation of shares.
But even they put Boohoo shares on a trailing P/E ratio (that’s the share price as a multiple of the firm’s actual earnings per share) of 56 based on results for the year ended February 2018.
Ultimately, growth shares tend to mature over the years, and their growth slows and dividend payments start to build up.
And their P/E ratios tend to fall back closer to the market average. In the case of the FTSE 100, that long-term average is around 14. To bring Boohoo shares down to that multiple, at the current share price, we’d need to see earnings per share multiply four-fold since that 2018 figure.
Can it happen?
And to see the share price treble while maintaining a P/E of around 14, earnings would need to multiply 12-fold since last year. Is that feasible?
It might be. My colleague Peter Stephens has pointed to Boohoo’s online-only benefits, which come from being one of the first movers in this new approach to the fashion business. And there really is a huge worldwide market out there, of which Boohoo and others have only just scratched the surface.
Boohoo is still way too risky for me, though, and I’m keeping out.
Alan Oscroft 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 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.