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.

| 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.

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.

More on Investing Articles

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Is now the time to buy BP shares? Here’s what the charts say

The best time to buy shares in a company is when they’re trading at a discount. But the future is…

Read more »

Investing Articles

Here’s how I’d use £50K to aim for a million when the stock market crashes

Seeing a stock market crash as a buying opportunity could prove lucrative for a well-prepared, long-term investor. Christopher Ruane explains…

Read more »

Stack of one pound coins falling over
Investing Articles

It’s up 27% with a P/E of 9! I’m considering the potential of this blossoming penny stock

Despite several years of losses, this UK penny stock has an impressive valuation. I’m looking to see if it could…

Read more »

US Stock

The Nvidia share price falls! Here’s what I think happens next for the S&P 500

Jon Smith reviews the overnight results from Nvidia and explains why this could stall the S&P 500 performance through to…

Read more »

Investing Articles

Down 15% today, is this FTSE 100 share too cheap for me to miss?

JD Sports' share price has tanked after the FTSE 100 share released another profit warning. Is this the opportunity I've…

Read more »

Investing Articles

Up 8% today, is this FTSE 100 growth stock a slam-dunk buy for me?

Halma's share price is soaring thanks to another headline-grabbing trading update. Is the FTSE 100 stock now too good for…

Read more »

Investing Articles

With a P/E ratio of just 10.5 is now a brilliant time to buy a cut-price FTSE 250 tracker?

Harvey Jones says a recent dip in the FTSE 250 leaves the index trading at bargain levels. One stock in…

Read more »

Warren Buffett at a Berkshire Hathaway AGM
Investing Articles

To build a passive income flow, I’d follow this Warren Buffett approach

Warren Buffett has set up passive income streams most people can only dream about. Our writer sees some practical lessons…

Read more »