When the Boohoo.com(LSE: BOO) share price started to soar a couple of years ago, peaking at over 270p in June 2017, I started to get a bit twitchy.
I'd seen the same before at ASOS, whose shares reached a high a couple of years previously, but then crumbled. Was it teething problems with worldwide supply logistics, or over-exuberance from get-rich-quick bandwagon investors?
Almost certainly some of both, and we've seen a remarkable recovery. ASOS shares have recently beaten their 2014 high, and though they've dropped back a bit since, they're still up 70% over five years.
Does the future hold the same for Boohoo? I think it could -- but I still reckon it's a very risky investment. Boohoo shares fell back quite some way from their peak last year, dropping a few points short of 50% at their lowest. But a resurgence in the past couple of months has seen them regain upward momentum. And while Boohoo shares are down 25% from their peak, they've still almost quadrupled over the past two years.
Are we looking at a steady upwards share price now or are investors in for a double whammy and a second downturn? For me it's looking like a 50:50 gamble.
On the upside, sales are booming as the online sales model for fashion really is taking hold. Why spend ages in a bricks-and-mortar store trying on lots of different pieces in crowded conditions when you can order a whole load of stuff, try it on in the comfort of your own home, and send back what you don't want?
We only have to look at the problems afflicting Marks & Spencer to appreciate the heavy overheads of running a full high-street retail chain. Although the erstwhile shoppers' favourite revealed full-year results in line with expectations (when many thought they'd fall short), the company plans to close 100 stores by 2022. It also hopes to move a third of its sales online, having fewer and bigger clothing stores in prime locations. Does that sound anything like Boohoo's model to you? It sounds to me like it's getting that way.
Last month we heard that Boohoo's revenue for the year to February 2018 had almost doubled, up 97% to £578m. Adjusted pre-tax profit rose by 60% to £51m with bottom-line adjusted earnings per share up 47% to 3.23p.
And if anyone feared the company, still very much in its expansion phase, could be getting over-stretched on the cash front, worry not. Net cash at the end of the period increased by £74.6m to £133m.
But at what price?
Now the downside -- the share price valuation. With analysts predicting a modest 15% rise in EPS in the coming year, forecasts put Boohoo.com shares on a P/E multiple of 54. Even a more impressive EPS rise of 26% pencilled in for February 2020 would bring that ratio down only as low as 42.5.
Ultimately I'd expect it to revert to closer to the long-term FTSE 100 average, and with that around 14, we'd need Boohoo's EPS to quadruple from this last set of figures.
That's certainly not out of the question over the next 10 years, and the shares could indeed double. But if there are any setbacks, we might see them halve instead. I'm slowly becoming less bearish on Boohoo.com, but it's still too heady and too risky for me.
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Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended ASOS. The Motley Fool UK has recommended boohoo.com. 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.