The Boohoo share price is too cheap to ignore

Since I last looked at the Boohoo (LSE: BOO) share price, back in August (and was tempted). shares in the fast fashion e-commerce company have fallen even further. They’re now too cheap for me to ignore, in my humble opinion.

Why is the Boohoo share price falling?

Part of the reason why the share price has been falling is that analysts are concerned that the company’s growth will not live up to expectations. Also, the retailer has reported an additional £26m charge related to rising shipping costs. Such costs, which have rocketed this year, have just heaped more uncertainty onto the company and made growing as fast as it has in the past more challenging.

Then there’s competition. The growth of Chinese group Shein seems to be concerning some investors. It has been reported that it’s exploiting tax perks to undercut Britain’s online retailers like Boohoo. Global sales at Shein are forecast to approach $20bn (£14.6bn) next year, so it’s a big player.

But a big part of the share price fall seems to be simply that sentiment is against UK e-commerce companies, as ASOS shares have also been falling through 2021 too. Boohoo’s issues are obviously compounded by well-publicised supply chain problems, including underpaying factory workers in Leicester, which the group is now trying very hard to fix.

Is Boohoo cheap?

With a forward price-to-earnings ratio (P/E) of 19 and a price-to-sales ratio of 1.33 Boohoo shares do appear to be cheap. All the more so when I think that just a few years ago the P/E would have been double or more what it is now.

When comparing the figures to ASOS, Boohoo’s valuation looks very reasonable. The former trades on a P/E of 25 and price-to-sales of 0.73.

I’d conclude that Boohoo is very cheap. It’s a stock that in 2020 grew earnings per share by 27% and this year by 44%. There’s little doubt in my mind that it’s a high-growth share. It also has no bank debt. In fact, it has around £100m net cash, so this also reduces risk and improves the outlook for the share price.

What could go wrong?

However, it’s not risk-free. For a start, there’s an inherent risk with a share price that’s down that it keeps falling. Trying to buy a declining share price is often called catching a falling knife. The phrase is apt because it’s difficult — and dangerous — to do.

To mitigate this risk I’ll likely buy the shares in tranches to benefit from cost averaging. The low valuation I think protects the long-term downsides. Another concern is just that the governance-related scandals and the environmental damage fast fashion causes put both private and professional investors off buying the shares, thereby reducing demand and limiting share price growth.

Overall though, I think the Boohoo share price is potentially too cheap to ignore. For me, the potential upside long term far outweighs the risks. I’m even more tempted now to add this share to my portfolio. 

Andy Ross owns no share mentioned. The Motley Fool UK has recommended ASOS and 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.