Should I go for the Boohoo share price, or is caution still needed?

Shares in Boohoo Group plc (LON: BOO) are surging and this Fool wonders if he’s made a mistake by staying away from the company.

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The last time I covered the Boohoo (LSE: BOO) share price, I concluded it might be sensible for investors to avoid the stock because it looked extremely expensive, even after factoring in the group’s explosive earnings growth.

That was at the end of February. Since then, the Boohoo share price has taken off. At the time of writing, the stock is up a staggering 48% year-to-date. So, is now the time to buy the Boohoo share price, or is caution still needed?

Driving growth

Investors rushed to its shares last week when the fast-fashion e-commerce retailer announced results for 2018. The company’s smashed expectations with revenue growth of 48% and adjusted earnings before interest and tax growth of 49% to £75.1m.

Profit before tax for the year increased by 38% to £59.9m, and diluted earnings per share increased 19% to 3.2p. Boohoo reported strong growth across its three primary businesses, the flagship Boohoo brand, PrettyLittleThing and Nasty Gal.

Growth was particularly impressive at PrettyLittleThing where revenues increased 107% to £374.4m, compared to just 16% at Boohoo itself. This division now comprises 44% of overall group revenue.

However, as I’ve mentioned before, the holding company only owns 66% of PrettyLittleThing, and it’s investing heavily in marketing this business. The number of active customers using PrettyLittleThing increased 70% year-on-year in 2019 to 5m, and these customers placed a total of 14.3m orders, up 89% year-on-year. The number of orders placed on Boohoo’s flagship platform rose 10% during the year to 14.9m.

These figures concern me because they show Boohoo’s growth is slowing and the company is becoming increasingly reliant on its subsidiaries to produce the kind of revenue growth the market has come to rely on. I’m not suggesting the two businesses might part ways anytime soon, but the fact that the parent doesn’t own all of the business could cause problems further down the line. The subsidiary is run by Umar Kamani, the son of Boohoo’s founder and chief executive Mahmud Kamani.

A high price to pay

I’m also still concerned about Boohoo’s valuation. At the time of writing, shares in the retailer are dealing at a forward P/E of 48.4 and a PEG ratio of 2.1. So even after factoring in the City’s lofty growth expectations (analysts have pencilled in earnings per share growth of 35% for 2020) the stock still looks expensive.

In my opinion, this eye-watering growth multiple doesn’t leave any room for disappointment. If the company fails to meet the City’s expectations for earnings growth, or if sales growth at any of the group’s subsidiaries starts to flag, shareholders could rush for the exits, and the downside could be substantial.

Considering all of the above, I’m still cautious for the Boohoo share price outlook. While the firm’s growth rate cannot be overlooked, I’m concerned about its valuation. There are many other companies out there that offer better value for your money, in my opinion.

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 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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