Why Boohoo’s share price has further to run after 650% gain in 3 years!

Boohoo Group plc (LON:BOO) has been going sideways for the past year but this week could be another turning point for the company.

| 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.

Boohoo (LSE: BOO) released an excellent set of results last week, with revenue and profit before tax up 50% and 22% respectively. But I think what really got investors excited and led to the 30% price jump was the 62% international growth. No clothing companies have yet come to dominate the online clothing space, and investors are understandably excited how quickly Boohoo is growing. It has a good opportunity to become a major brand in the global youth clothing market if it can continue to spread abroad.

Premium price

Following the surge in the price (244p at the time of writing, having traded as low as 32.5p this time three years ago!), the shares now trade on a price-to-earnings ratio (P/E) in excess of 85. While I’m not opposed to a high P/E, the company has to demonstrate that it can achieve exponential growth. Comparatively, two of my favourite online clothing retailers, Superdry and Next, trade on P/Es of around 10 and 12 by comparison, and are both still growing. The reason that investors are willing to pay more for Boohoo is how quickly it is growing and the size of the market that it can target.

Some doubts over management

Investors new to this stock may wonder why the share price has stalled over the past year until recently, and it is at least in part because the subsidiary PrettyLittleThing is outstripping the growth of the main Boohoo brand. This has irked shareholders as the two ex-CEOs, and their families have a much larger holding of PrettyLittleThing compared to Boohoo Group overall, and this is where most of the growth is now occurring. The Boohoo brand grew 15% while PrettyLittleThing grew 132%, leaving many to wonder if there is a conflict of interest that will harm shareholders. A new CEO has now been appointed from Primark, which looks like a smart choice; however, the ex-CEOs are now in executive positions so this conflict of interest remains.

The new CEO John Lyttle has been given a target of increasing the share price by 23% over the next 5 years, and I have little doubt that he will achieve this. My main reservation is how little room for error there is with the current share price. Growth of the Boohoo brand is now slowing, and with PrettyLittleThing approaching the same size, there is a chance that it is approaching maximum market share. There is a chance that the bigger both brands get, the more they will compete with each other and growth could stall.

I think Boohoo Group is going to continue growing well over the next few years and I was considering a position before the results. There are just two problems for me: the first is obviously the valuation. This alone is not a deal-breaker, but considering the conflict of interest as well, there is just too little value so I’ll keep looking for a better opportunity.

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.

Robert Faulkner owns shares in Superdry. 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

Investing Articles

£10k in savings? These 2 gems could make £832 in passive income

Jon Smith outlines a couple of dividend shares with an average yield above 8% that could enhance a passive income…

Read more »

Growth Shares

This major UK bank just updated the forecast for the Rolls-Royce share price

Jon Smith talks through an analyst forecast for the Rolls-Royce share price and explains why he thinks further gains could…

Read more »

Middle-aged white male courier delivering boxes to young black lady
Investing Articles

This FTSE 100 share looks like a Black Friday bargain for me!

Our writer explains why he recently took the opportunity to buy this ultra-cheap FTSE 100 share after its 39% year-to-date…

Read more »

Investing Articles

What will happen to the stock market in 2025? Here’s what the experts say

The UK stock market did well at the start of this year but has faltered towards the end. Our writer…

Read more »

Investing Articles

After plunging nearly 40%, I’m considering buying this bargain FTSE 100 stock

Paul Summers has been running the rule over one of the year's biggest FTSE 100 losers. Is a screamingly cheap…

Read more »

Ice cube tray filled with ice cubes and three loose ice cubes against dark wood.
Investing Articles

Just released: this month’s lower-risk, higher-yield Share Advisor recommendation [PREMIUM PICKS]

Ice ideas will usually offer a steadier flow of income and is likely to be a slower-moving but more stable…

Read more »

Investing Articles

Should I buy growth or value in my Stocks and Shares ISA?

Here’s why Stephen Wright's looking past the difference between growth stocks and value shares when finding investments for his ISA.

Read more »

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

If I’d invested £5,000 in a Nasdaq index fund 5 years ago, here’s how much I’d have now

The Nasdaq index keeps hitting new all-time records in 2024, as US tech stocks fly. How much could I have…

Read more »