Image source: Getty Images
boohoo (LSE:BOO), the online fashion giant known for its fashion styles and targeted marketing, has experienced a roller coaster ride in recent years. Boohoo's share price, once the darling of the stock market, has plunged more than 20% in the last year alone. But is this a sign of a sinking ship or a buying opportunity for savvy investors?
What is happening?
Analysts are divided. While the company has certainly faced challenges, some see reasons to make this a stock worth watching.
Boohoo's recent problems can be attributed to a confluence of factors. In November 2023, the company issued a profit warning, citing a slowdown in consumer spending and rising costs. The primary demographic, young adults ages 16 to 45, were reportedly feeling the impact of inflation and cutting back on discretionary expenses like clothing.
Additionally, the fast fashion industry itself has experienced other major obstacles in recent years. Consumers are becoming more environmentally conscious and opting for sustainable clothing options, moving away from fast fashion. Boohoo's business model, based on mass-producing low-cost fashion clothing, may not resonate as strongly with this new wave of eco-conscious shoppers.
As a result, the share price has plummeted more than 85% in the last five years.
Signs of hope
Despite the current pessimism, there are reasons to be cautiously optimistic. First, analysts predict annual earnings growth of a staggering 80% in the coming years. It is true that there are still no signs of profits in the future, but a long-term investor can be rewarded if this trend continues.
Secondly, the company is an expert in using social media and influencer marketing to reach its target audience. In the ever-evolving retail landscape, this could be a massive growth area.
The third factor, and the most interesting to me, is the potential valuation. A discounted cash flow calculation suggests the company is undervalued by about 34%. Although this is not a guarantee, with so much potential, I would consider it worth delving deeper into the balance sheet.
Currently, debt levels appear to be under control. Additionally, there is a strong reserve of cash available, but as the sector has seen in the past, those resources can disappear very quickly in the wrong environment.
Risks remain
Before jumping on the bandwagon, it's important to recognize that there are still many concerns that have dogged the company in recent years. There have been accusations of poor working conditions in its supply chain. These controversies can damage a company's reputation and seriously alienate consumers who value ethical practices.
Furthermore, boohoo faces stiff competition from established players such as ASOS and emerging rivals such as PrettyLittleThing. The online fashion market is crowded and boohoo will need to innovate and adapt to stay ahead.
I am buying?
The potential rise in Boohoo's share price is certainly tempting. But it's important to remember that this is just an estimate and the share price could easily go down even further.
For long-term investors who believe in the company's ability to overcome its challenges and adapt to the changing retail landscape, then the current share price could be an attractive entry point. However, I still don't have much confidence that these problems can be resolved soon. I'll stay well away for now.
