Over the past year, the Boohoo (LSE:BOO) share price has fallen 72%. That’s quite a steep slump, and when reviewing the chart, it has traded lower in a linear fashion over this period. As of the closing price on Friday, it’s also now classified as a penny stock, with a price of 99p. When stocks are continuously falling, some liken it to a falling knife. Sure, this presents dangers, so should I stay away or is now actually a good time to buy Boohoo shares?
The case for staying away
Personally, I can see several reasons why Boohoo shares have struggled over the past year. Firstly, since last summer we’ve all been made aware that inflation has been rising in the UK. This is clear from the higher cost of goods. A company like Boohoo, although it tries to pass costs on, does have to absorb some of it as well.
As noted in the latest quarterly trading update, the business is experiencing pandemic-related cost inflation. As a business, if revenue is steady but costs increase, profit falls. Boohoo has estimated that such cost inflation will impact EBITDA by approximately £20m in the fiscal year.
Another reason for wanting to steer clear is the lower outlook projections given for the final quarter of the financial year. It now expects sales growth to be 12-14%, revised down from the previous estimate of 20-25%. The adjusted EBITDA margin for the year has also been trimmed to 6-7%, from 9-9.5% previously. As seen last week, lower outlook and missed expectations can cause a stock to tumble, even for giants such as Meta.
Some optimism for Boohoo shares
On the other hand, I think there are positives to be found in the business. The company is still growing at a strong pace. Even if net sales only grow by 12-14%, that’s not a bad performance. The year I’m comparing it to was 2020, when the online-only business enjoyed strong demand due to lockdowns. Being an online retailer certainly helped during this period, as people could only shop from home for many goods.
Another point that I think some investors are missing is that the cost inflation and supply chain issues are likely temporary. I don’t mean that they’ll disappear next week, but I struggle to see them still being issues this time next year. The Bank of England is already stepping in to try to control inflation at a broad level by raising interest rates. In terms of supply chain issues, I know there are plenty of initiatives going on at ports and other places to rectify such problems.
My point here is that I think Boohoo shares currently price-in the worst-case scenario. I think people are thinking too short term. I don’t think this is a falling knife to run from. I’m considering buying some shares now as an undervalued penny stock.
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Jon Smith has no position in any share mentioned. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. 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.
