On the face of it, the Boohoo (LSE: BOO) share price looks cheap. The stock is trading at around 114p per share. This time last year, the share price was around 360p. As such, the stock looks cheap compared to its trading history.
However, just because the stock looks cheap does not mean the company is cheap. The stock price movement does not tell us much about the underlying fundamentals of the enterprise.
So from a fundamental perspective, I can see why some investors might think the business is worth less today than it was at the beginning of 2021.
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Boohoo share price performance
At the beginning of last year, Boohoo was riding high on the back of the lockdown shopping boom. Group profit jumped 44% in its 2021 financial year, as the e-tailer capitalised on its position in the online retail market.
The market seemed to believe that this trend would continue. Unfortunately, Boohoo’s growth has not continued.
Even though the company’s top line has expanded, higher costs, due to inflation and an increased number of returns, have nibbled away at the group’s profit margin. As such, net profit is projected to fall by 25% in the current financial year.
Based on current City growth estimates, the stock is now trading at a forward price-to-earnings (P/E) multiple of 19.3. Once again, this looks cheap compared to the company’s history. The Boohoo share price has historically commanded a multiple in the region of 20-40 times earnings.
Nevertheless, past performance should never be used to guide future potential. Just because the stock commanded an elevated valuation in the past does not mean it should continue to trade a high multiple.
Boohoo is no longer a high-growth stock. Therefore, it is difficult to justify a high-growth multiple for the shares.
Additional challenges
The company may also continue to face additional challenges. Inflationary pressures and competition in the e-commerce market are two challenges that will not disappear anytime soon. These headwinds will remain a challenge for the foreseeable future, and they could continue to impact the group’s growth.
As such, while I do think the Boohoo share price appears cheap compared to its great potential, I do not think the stock has the potential to double from current levels. The business is facing far too many challenges to return to its high-growth multiple.
Of course, this is just speculation on my part. The stock could double in value over the next couple of years if it manages to surpass growth expectations. The Boohoo share price should track its underlying fundamental performance in the long run. Therefore, if earnings double over the next five years, I do not think it is unreasonable to say that the stock could double as well.
For this reason, I would buy the stock for my portfolio. I think the company has potential, and I am willing to wait to realise the growth.
