The Boohoo (LSE: BOO) share price is attracting attention because of its recent big plunge. That’s grim for existing shareholders. But should I buy the stock now? I’m not convinced that would be a good idea for me.
The online fast-fashion retailer’s stock price peaked in June 2020 near 410p. And, since then, the trend has been down, albeit with a few wiggles along the way. Since August, the rate of decline accelerated to leave the shares near 175p today.
Is the rate of earnings growth set to decline?
Meanwhile, City analysts have pencilled in double-digit percentage estimates for increased earnings in the current trading year to February 2022 and for the following year. And set against those assumptions, the forward-looking earnings multiple is around 16.
That valuation is a little higher than Next‘s, for example, but not much. And that makes me wonder whether the stock market has de-rated Boohoo to adjust for slowing growth in earnings in the years ahead.
After all, with the benefit of hindsight, the best time to hold the shares was from early 2015 through to the summer of 2017. Back then, the company first emerged as a fast-growing outfit with impressive advances in earnings. And the stock market rerated the valuation higher.
But fast-paced growth can’t go on forever as businesses get bigger. The rate of growth almost always slows over time. And, sadly, the share price today is below its level in 2017. If I’d held the stock since then, my money would have been ‘dead’ for years. And there haven’t even been any shareholder dividends over that period to compensate me.
There’s no sign of dividends ahead either. And, for me, that’s a sticking point in the case for investing in the stock now. If the rate of growth is set to decline, the valuation now is closer to fair than it is to cheap, in my view. But without a dividend, why would I take the risk? After all, there are so many other companies around with both shareholder dividends and growth prospects in the underlying business.
An upbeat outlook
However, in September’s half-year results report, the company delivered an upbeat assessment of the prospects for the business. The directors are “extremely confident” about future growth prospects. And they expect short-term uncertainty about demand and cost headwinds to unwind. They reckon the business will likely achieve sales growth of 25% per year in the medium term with an adjusted EBITDA margin of 10%.
Despite many short-term and well-reported challenges, Boohoo may go on to deliver steady growth in the years ahead. But I’m not expecting a rapid up-rating of the valuation or a sudden bounce-back of the share price. My guess is future rises in the share price will require impetus from solid underlying progress in the business.
Perhaps the days of investor speculation moving the price are over. Although I could be wrong. Nevertheless, I’m watching the stock from the sidelines for the time being and I’m curious to see where the plunge will end.
Kevin Godbold has no position in any of the shares 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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