Over the past six years, the Boohoo (LSE: BOO) share price has surged as the company’s earnings have jumped from £12m to £91m.
However, shares in the fast-fashion retailer have come under recent pressure as the market has reevaluated the group’s prospects. I think this trend could be short-lived as Boohoo’s growth continues. In fact, I believe there is a chance the stock could double in value over the next five years.
Boohoo share price outlook
City analysts expect Boohoo’s earnings per share to rise from 7.2p for its 2021 financial year to 11.2p by 2023. Based on these estimates, the stock is selling at a 2023 price-to-earnings (P/E) multiple of 17.1.
Considering the fact that the stock has attracted a multiple in the mid-20s in the past, this valuation seems to undervalue the enterprise.
But that is not all. These figures only take into account Boohoo’s growth during the next two years. They give no account to its potential over the next five years.
Between 2023 and 2026, I think there is a high chance the firm’s earnings per share could expand at a compound annual growth rate of 10%. And this is a conservative estimate. Over the past six years, the company’s earnings have grown at an average yearly growth rate of more than 40%.
Using my conservative projection, I believe the company’s earnings per share could stand at around 15.1p by 2026. Placing a mid-20s P/E on this figure gives a price of between 360p and 400p, depending on the multiple I use.
Growth headwinds
This is just a rough estimate of where the Boohoo share price could be trading in five years. There is plenty that could go wrong with these targets. The company’s growth may fail to live up to expectations, and the market may continue to give the stock a low multiple.
Both of these factors could hold back the stock price. Other challenges, such as rising costs due to inflation and competition, could also hold back growth.
Nevertheless, I think my figures show the group’s potential here. I also believe these numbers show that the market is currently undervaluing the business. What’s more, they also give no regard to the company’s strong balance sheet.
If I deduct Boohoo’s cash balance from the firm’s valuation, the stock looks even cheaper. As the company has been using this cash to invest in growth by acquiring struggling brands, I think I should factor this into the valuation as it will help support overall growth.
The bottom line
Overall, based on the above, I would buy the stock for my portfolio today. As my numbers show, the Boohoo share price could have massive potential over the next few years. Considering the stock’s current valuation, I want to take advantage of the market’s short-term outlook and acquire the shares.
Rupert Hargreaves 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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