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Boohoo’s share price has fallen. Should I buy the stock now?

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Boohoo’s (LSE: BOO) share price has been volatile in 2021. At times, it’s surged higher. On other occasions, it has pulled back sharply.

Recently, the stock has pulled back again. As I write, it’s now close to its 2021 lows. Is this a buying opportunity for me? Let’s take a look at the investment case.

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What I like about Boohoo

There are a number of things I like about Boohoo. For starters, it owns a number of powerful brands including PrettyLittleThing, Nasty Gal, MissPap and, of course, Boohoo. This year, it’s added more top brands to its portfolio including Debenhams, Dorothy Perkins, and Burton. These new additions could boost growth significantly. I particularly like the Debenhams acquisition. Its UK website gets approximately 300m visits per year.

Secondly, Boohoo and its brands have incredible social media presence. On Instagram, for example, PrettyLittleThing has 13.1m followers (up from 12.5m in September) while Boohoo has 7.2m followers. Through Instagram, consumers can click through to purchase goods.

Third, the company is growing at a phenomenal rate. Its last trading update in January showed total revenue growth of 40% for the four months to 31 December. There aren’t many retailers in the UK generating that kind of top-line growth.

Finally, the company is financially strong and very profitable. Over the last three years, return on capital employed (ROCE) has averaged 22%.

US import ban?

Boohoo isn’t perfect however. The company seems to be regularly in the news for all the wrong reasons.

For example, just last week, Sky News reported Boohoo and many of its suppliers are facing the possibility of a US import ban because of widespread allegations over the use of “slave labour”. According to Sky, US Customs and Border Protection (CBP) has seen enough evidence to launch an investigation into the company.

Boohoo replied that it’s confident in the actions it’s taking to ensure all of its products meet the CBP criteria on preventing the product of forced labour entering the US. It also advised it hasn’t been notified of any investigation. However, this issue adds uncertainty to the investment case. US sales are currently about 25% of group total. So, a US ban would be a huge setback for the company.

Is Boohoo’s share price a bargain?

Turning to the valuation, Boohoo shares currently trade on a forward-looking P/E ratio of about 31. Normally, I’d say that’s an attractive valuation for a company growing as fast as Boohoo. However, given the uncertainty over the US investigation, that valuation does add some risk.

My view on BOO shares

Overall, I’m cautiously optimistic in relation to the outlook for Boohoo shares. There are certainly risks to be aware of. However, in my view, the company continues to have significant growth potential. I’d be willing to buy a small amount of shares for my portfolio today after the recent pullback.

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Edward Sheldon owns shares in Boohoo. 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.

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