The Boohoo (LSE:BOO) share price has been quite volatile over the last 12 months, rising and falling by double-digit percentages in a relatively short space of time. But recently, things appear to have begun stabilising. And it is now on an upward trajectory.
So what caused all the volatility in the first place? Will the share price continue to rise? And should I be adding this stock to my portfolio?
The volatile Boohoo share price
In early July last year, the Boohoo share price crashed by nearly 50% following allegations made by The Sunday Times. The newspaper was the first of many to accuse Boohoo of poor labour practices as well as putting its workers at risk during the pandemic.
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Needless to say, this is quite serious. And so I wasn’t surprised when other clothing retailers dropped Boohoo’s products from their e-stores. To make matters worse, the company could even be facing a US import ban on its products, reports have claimed.
Boohoo swiftly launched an independent review of its business to investigate these allegations. And in September, the review found no evidence of any criminal activity. The management team also stated it was not aware of any ongoing investigations by the US Customs and Border Protection agency but is prepared to work with authorities if requested to do so.
These allegations, while unproven, have created some notable reputational damage. And looking at Boohoo’s volatile share price, there appears to be quite a bit of uncertainty as well. Based on current information, I think it’s unlikely that Boohoo will receive a US ban. But if it does, then a quarter of the firm’s total revenue would disappear. And it would also lose access to its fastest growing market.
The underlying performance is encouraging
Setting aside these issues, the company itself is performing exceptionally well. At least, I think so. In January earlier this year, Boohoo released a trading update that showed total revenues grew by 42% over the last 10 months. Seeing that level of growth coming from a fashion retailer is exceptional in my experience. And it would seem that the loss of the previously mentioned partnerships with other retailers hasn’t had a significant impact on performance.
What’s more, the increased profits are being put to good use. Boohoo recently announced an expansion to its warehouse facilities to be completed later this year. Once operational, the site will substantially increase the business’s annual sales capacity. Combined, its four locations will give the group net sales capacity in excess of £4bn. Assuming it can continue generating more orders to take advantage of this increased capacity, I believe that the Boohoo share price can continue to climb even higher over the long term.
The bottom line
Boohoo continues to impress me. However, there is no denying that the scrutiny the company is currently facing adds a considerable level of risk and uncertainty. At today’s share price, Boohoo has a P/E ratio of around 50, which is relatively expensive even with its impressive growth.
And in my experience, a high valuation mixed with uncertainty don’t tend to be a winning combination. So, while I do believe the business will thrive over the long term, I’m not going to be adding any shares to my portfolio today.
