Soaring profits fail to boost the Boohoo share price. Is this a buying opportunity?

Despite a 40% jump in revenue, the Boohoo share price is way down from 2020’s peak. Here’s why I’m thinking of buying right now.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

If I didn’t already own Boohoo (LSE: BOO) shares, I’d be buying now, after last week’s bumper profits boost. The online fast-fashion giant reported a 41% jump in revenue, with bottom line adjusted EPS gaining 47%. But the Boohoo share price has slipped back a bit since the results were announced. And over the past 12 months, it’s down 8.5%.

We are still looking at a 30% increase over the past two years, covering the whole of the Covid-19 crash period. But it’s been a very volatile ride, with huge swings. Why would I buy now?

I invested in Boohoo because I think the company has a great long-term future and the shares were attractively valued. I still think that. But I also think I’m seeing a contrarian buying opportunity.

It’s perhaps a risky investment, with the company still very much in a growth phase. And there’s been some negative news of late. Boohoo now owns an impressive array of brands, with Debenhams famously added to the stable. But that’s leading to some problems.

Customers have found the same clothing priced differently under different brands. And we’ve had stories of garments being relabelled from one brand and sold under another. That’s not good for customer loyalty, it’s not good for investors, and it’s not good for the Boohoo share price.

End of lockdown

Before I get to the positives, I think I’m seeing another short-term phenomenon. That’s a post-lockdown slump for online businesses that were doing so well during the crash. While we couldn’t get out to the high street, internet shopping had it sewn up. The shares stormed ahead as a result.

By June last year, Boohoo was well ahead of its pre-pandemic price. But that was overly enthusiastic, and we’re seeing the aftermath. And, as usual with share prices, I reckon the market is overreacting again, but in the other direction.

But those full-year results were sparkling, weren’t they? As well as strong profit growth, Boohoo results showed two things I think should support the Boohoo share price going forward.

Firstly, margins are fat. Boohoo boasted a gross profit margin of 54.2%, up slightly from the previous year’s 54%. And then there’s what I like best of all. Cash. At the end of the year in February, Boohoo had £276m net cash on the books. 

Boohoo share price weakness

Never mind picking through the ruins of all those big companies shouldering growing debt due to the pandemic, looking for the best recovery hope. Well, actually, I think that can be a profitable strategy too. But while some giants were struggling, Boohoo’s cash pile jumped by £35.4m. Operating cash flow gained too, at £201m (up from £127m).

There’s a slight greyness over the outlook, mind. The company says it expects around 25% revenue growth in the current year. While many companies would be delighted with that, it’s a fair drop from the current 41% growth. That will surely underlie the Boohoo share price weakness too.

But when growth stocks see growth fall back a bit, I think that can be a great time for long-term investors to top up. I might just do that.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Alan Oscroft owns shares of 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.

More on Investing Articles

Mature couple at the beach
Investing Articles

6 stocks that Fools have been buying!

Our Foolish freelancers are putting their money where their mouths are and buying these stocks in recent weeks.

Read more »

Black woman using loudspeaker to be heard
Investing Articles

I was right about the Barclays share price! Here’s what I think happens next

Jon Smith explains why he still feels the Barclays share price is undervalued and flags up why updates on its…

Read more »

Investing Articles

Where I’d start investing £8,000 in April 2024

Writer Ben McPoland highlights two areas of the stock market that he would target if he were to start investing…

Read more »

View of Tower Bridge in Autumn
Investing Articles

Ahead of the ISA deadline, here are 3 FTSE 100 stocks I’d consider

Jon Smith notes down some FTSE 100 stocks in sectors ranging from property to retail that he thinks could offer…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

Why I think Rolls-Royce shares will pay a dividend in 2024

Stephen Wright thinks Rolls-Royce shares are about to pay a dividend again. But he isn’t convinced this is something investors…

Read more »

Investing Articles

1 of the best UK shares to consider buying in April

Higher gold prices and a falling share price have put this FTSE 250 stock on Stephen Wright's list of UK…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

The market is wrong about this FTSE 250 stock. I’m buying it in April

Stephen Wright thinks investors should look past a 49% decline in earnings per share and consider investing in a FTSE…

Read more »

Black father and two young daughters dancing at home
Investing Articles

1 FTSE 250 stock I own, and 1 I’d love to buy

Our writer explains why she’s eyeing up this FTSE 250 growth phenomenon, and may buy more shares in this property…

Read more »