What will happen to the Boohoo (LSE: BOO) share price in November? That is a question I have been asking myself after the stock’s recent performance.
Shares in the fast-fashion online retailer have slumped 42% year-to-date. Over the past 12 months, the stock has declined 25%.
The sell-off has accelerated in recent weeks. In the past month alone, shares in the firm have lost 25% of their value. If this performance continues, the company’s valuation could half from current levels by Christmas.
Of course, this is only an illustration of how quickly Boohoo has fallen out of favour with the market. There is no guarantee the stock will continue to decline at its current rate. Investor sentiment can improve just as quickly as it deteriorates.
But this performance does show how the market’s opinion of the company has deteriorated over the past six months. Boohoo was once a London market darling. At one point in 2020, the stock was changing hands for more than 400p apiece. Today, it is less than half that.
Boohoo share price performance
Bizarrely, the market has fallen out of love with the company even though its profits and sales have improved. Boohoo recently reported a near-20% increase in revenues for the six months ended August 2021, compared to the same period last year.
While the company’s net income declined more than 60%, management blamed this on one-off factors, such as Covid-related costs. The firm also reported a substantial increase in capital spending for the first half of its financial year (the six months to the end of August). Capital spending hit a record £172m during the period.
Despite the company’s growth, the market has been spooked by rising costs. Management expects adjusted earnings before interest, tax, depreciation and amortisation margins will be 9-9.5% for the current financial year, compared to 9.5-10% as previously guided. Further, capital spending will be £275m for the year, compared to £250m.
These numbers are disappointing, but they reflect the pressures the entire economy is facing. Costs are increasing, and companies are struggling to pass higher prices on to consumers. If this trend continues, profit margins may continue to decline, jeopardising profitability. This is probably the most considerable risk and challenge facing the corporation right now.
Still, businesses are also having to increase wages, which could have a positive impact on demand. This may lead to increased sales for the group, which could offset margin compression.
Several factors at work
So there are several factors at work here. Unfortunately, investors seem to be concentrating on the bad and ignoring the good. I think that is a mistake.
While it is impossible to predict what the future holds for any stock price, when it comes to Boohoo, I think the firm is only becoming cheaper by the day. It is a rapidly growing e-commerce leader, with a cash rich balance sheet and significant consumer visibility. If the market does not realise the value, a competitor will, which could mean a buyout.
As such, I do not know where the Boohoo share price will go in November, but I can say that as the stock gets cheaper, it will only become more appealing as an undervalued growth opportunity. That is why I would buy the shares for my portfolio.
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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