As I write, the share price of online fast-fashion retailer Boohoo (LSE: BOO) is near 148p. Previously, the stock peaked above 400p in the summer of 2020 after staging an impressive bounce-back from the coronavirus market crash that spring. Things looked good for the company’s shareholders for a while.
The big plunge of 2021
However, the stock started 2021 near 350p. Then, in February, it began its plunge to the current level.
Nothing is certain in the world of stock investing, but I’d expect Boohoo to stop falling at some point. Especially if the underlying business remains in good shape. For me, the question then becomes what is the ‘right’ price for the stock and can it return to the lofty heights it once achieved near 400p?
And to answer, I think Boohoo may be capable of returning to levels near its peak. But I’d be surprised if that happens in 2022.
With regard to the falling share price, I think short-term concerns may have given way to longer-term doubts about the pace of growth. Indeed, Boohoo was once a small, fast-growing enterprise. But it’s normal for businesses to grow at a slower pace as they become larger. However, high valuations can persist before adjusting to match current rates of growth.
Sometimes businesses simply grow into their valuations with stock prices remaining flat for years. But other times, a valuation can de-rate lower because of a plunging stock price, such as Boohoo’s now.
Boohoo needs to find its ‘correct’ valuation
And well-reported short-term challenges regarding the firm’s supply chain could have shaken investor confidence a bit and kicked off the de-rating. Although Boohoo has done much to clean things up and wasn’t directly involved in employing underpaid labour in the first place.
It’s also possible pressure on Boohoo’s share price could be continuing because of the rise of the Omicron variant of Covid-19. However, before Omicron emerged, the directors said in September’s half-year results report they were “extremely confident” in Boohoo’s growth prospects.
Back then, they expected short-term demand uncertainty and material cost headwinds to unwind as the pandemic declined. So although Omicron could be the source of a setback on that front, the directors expect the business to grow its sales at the rate of 25% a year, while maintaining a 10% adjusted EBITDA margin in the “medium term”.
Meanwhile, I reckon the valuation should reflect the sustainable growth rate of earnings. And City analysts’ estimate for the current year and next year average out to around 21%. So the current forward-looking earnings multiple of just over 13 looks a little low to me. But if the stock rose to 400p again, the multiple would be near 36 and too high for my liking.
My best guess is that the share price will likely bounce up a little during 2022, but not as far as 400p. However, I could be wrong. And in any case, further progress after that will likely be dependent on sound operational advances. And that, of course, is not certain. It never is with any stock market investment.
Kevin Godbold 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.
