Is the Boohoo share price the bargain of 2018?

Boohoo.com plc (LON: BOO) looks to be getting ready for a sudden move higher.

| 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.

Throughout 2016 and early 2017, Boohoo (LSE: BOO) shares proved the firm to be a market darling. 

Between the beginning of 2016 and the middle of 2017, the stock produced a return for investors of nearly 640%, smashing almost every other companies’ performance record over the same period.

However, since peaking in June 2017, the share price has languished. In fact, the shares have fallen 19% since then, underperforming the FTSE 250 by a staggering 27%.

Passive income stocks: our picks

Do you like the idea of dividend income?

The prospect of investing in a company just once, then sitting back and watching as it potentially pays a dividend out over and over?

If you’re excited by the thought of regular passive income payments, as well as the potential for significant growth on your initial investment…

Then we think you’ll want to see this report inside Motley Fool Share Advisor — ‘5 Essential Stocks For Passive Income Seekers’.

What’s more, today we’re giving away one of these stock picks, absolutely free!

Get your free passive income stock pick

Nevertheless, despite this recent performance, I believe that the share price could be gearing itself for a sudden move higher, and it could even be the bargain of 2018.

Story stock

Boohoo became a story stock in 2016. As investors rushed to get in on the company’s growth, its valuation exploded. Still, even though the underlying business has multiplied in size, it has not kept up with investor expectations.

It now looks as if the shares are taking a breather, allowing the fundamentals catch up.

For example, the share was changing hands for nearly 140 times forward earnings in 2016, an eye-watering valuation usually reserved for the fastest growing tech stocks and blue sky opportunities. And even though earnings per share jumped 96% during 2017, it was not enough to justify the premium valuation.

Now, after two years of rapid growth, the shares are starting to look more attractive again. While the stock might not qualify as a value investment, trading at 55 times forward earnings, when compared to projected earnings growth of 41% for 2019 and 26% for 2020, this valuation is no longer as outrageous as it once was. Boohoo also has a history of surpassing market expectations.

But it’s not just the lofty valuation that has been responsible for the company’s underperformance in recent months. The City is also worried that increasing competition from the likes of Asos (LSE: ASC) is weighing on profit margins, requiring higher levels of capital expenditure to stay ahead of the game.

Fighting for customers 

For its part, Asos has also seen investors turn away from the company in recent months. After topping out at a little over 7,600p in March, the stock fell to a low of 5,930p before rebounding. 

Even after this modest recovery, however, it is still trading 14% below the all-time high.

Compared to the Boohoo share price, it looks expensive. Analysts are expecting the company to report earnings per share growth of 25% for 2018, followed by an increase of 23% for 2019. However, even though it is expected to grow at a slower rate than its smaller peer over the next two years, the market has awarded its shares a much higher valuation. Specifically, shares in Asos are currently trading at forward P/E of 69, falling to 56 next year.

As Asos is Boohoo’s only real comparable here in the UK, I believe it is sensible to compare these two companies on a valuation basis, and it’s not clear to me the bigger firm deserves the higher multiple, especially considering it’s lower growth rate. 

The one advantage it does exhibit is its more extensive and more established international presence, although Boohoo is investing heavily in its international businesses to try and close the gap.

This brings me back to Boohoo’s spending plans. Asos has proven that it can expand profitably while still growing profits. But as Boohoo’s growth continues, the company has some work to do on this front.

Still, while the City frets about its profit margins, the company’s management does not appear to be concerned. Indeed, management recently guided that the group’s profit margin (earnings before interest, tax, depreciation and amortisation) would be 9% to 10% for 2018-19 and remain at this level for the foreseeable future. Moreover, as my Foolish colleague Alan Oscroft recently pointed out, with £133m of net cash on the balance sheet, the enterprise has plenty of capital to fund its expansion plans.

The bottom line 

So overall, considering the above, I believe the Boohoo share price could be set for a substantial move higher in 2019.

As the company continues to turn out earnings growth and matches profit expectations, the market will likely reward the firm by placing a higher valuation on its stock — one that’s closer to that of Asos. And with this being the case, I believe this growth champion could be the bargain of 2018.

But this isn’t the only opportunity that’s caught my attention this week. Here are:

5 Shares for the Future of Energy

Investors who don’t own energy shares need to see this now.

Because Mark Rogers — The Motley Fool UK’s Director of Investing — sees 2 key reasons why energy is set to soar.

While sanctions slam Russian supplies, nations are also racing to achieve net zero emissions, he says. Mark believes 5 companies in particular are poised for spectacular profits.

Open this new report5 Shares for the Future of Energy — and discover:

  • Britain’s Energy Fort Knox, now controlling 30% of UK energy storage
  • How to potentially get paid by the weather
  • Electric Vehicles’ secret backdoor opportunity
  • One dead simple stock for the new nuclear boom

Click the button below to find out how you can get your hands on the full report now, and as a thank you for your interest, we’ll send you one of the five picks — absolutely free!

Grab your FREE Energy recommendation now

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.

Rupert Hargreaves owns no share 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.

Like buying £1 for 51p

This seems ridiculous, but we almost never see shares looking this cheap. Yet this recent ‘Best Buy Now’ has a price/book ratio of 0.51. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 51p they invest!

Of course, this is the stock market where money is always at risk — these valuations can change and there are no guarantees. But some risks are a LOT more interesting than others, and at The Motley Fool we believe this company is amongst them.

What’s more, it currently boasts a stellar dividend yield of around 8.5%, and right now it’s possible for investors to jump aboard at near-historic lows. Want to get the name for yourself?

See the full investment case

More on Investing Articles

Investing Articles

Up 20% in a month, should investors consider buying Marks & Spencer shares?

Shares in retailer Marks and Spencer have surged ahead over the last month, despite a cyberattack. Roland Head takes a…

Read more »

Charticle

Here are the latest growth and share price targets for Nvidia stock

Ben McPoland checks out the latest forecasts for Nvidia stock to assess whether it might be worth considering for a…

Read more »

Growth Shares

Yikes! This could be the most undervalued growth stock in the FTSE 100

Jon Smith flags up a growth stock with a low price-to-earnings ratio and a share price back at 2020 levels…

Read more »

Abstract bull climbing indicators on stock chart
Investing Articles

3 beaten-down FTSE 250 shares to consider buying before the next bull market

Paul Summers thinks brave investors should ponder buying some of the FTSE 250s poor performers before they recover strongly.

Read more »

Investing Articles

Gold prices soar while the Fresnillo share price slumps. What gives?

With a gold bull market in full swing, this Fool argues that the falling Fresnillo share price may not remain…

Read more »

Investing Articles

2 FTSE 100 shares I’m avoiding like the plague right now

While the FTSE remains packed with opportunity, many of the index's blue-chip shares could be at risk as trade tariffs…

Read more »

Young mixed-race woman jumping for joy in a park with confetti falling around her
Investing Articles

Here’s how an investor could aim for a million buying under 10 shares

Christopher Ruane explains why doing less, not more, of the right things could be the key to success as an…

Read more »

Investing Articles

Could this new risk cause a stock market crash?

Tariffs and a potential recession are two major stock market risks right now. But there’s another risk that concerns Edward…

Read more »