Could the Boohoo share price crash 50% by the end of the year?
Stock market conditions appear to be changing. Growth stocks that fall slightly short of expectations are being punished severely.
Online fast fashion retailer Boohoo Group (LSE: BOO) has escaped this fate, so far, despite having risen by a staggering 590% over the last three years.
Back in June, I suggested that investors might want to continue buying Boohoo. The shares have gained 10% since then. Can they continue to rise?
A changing business?
Boohoo recently published its half-year results, causing the shares to gain about 25% in a single day. The figures looked impressive to me, with six-month sales up by 50% to £395m, and pre-tax profit up 22% to £24.7m.
However, the group’s partial ownership of fast-growing brand PrettyLittleThing means that Boohoo shareholders aren’t enjoying all the fruits of the firm’s success. Some of the profits are going directly to the firm’s founders.
Robert also highlighted concerns about conflicts of interest in the boardroom. It’s not clear how much freedom incoming chief executive John Lyttle will have, given that his predecessors — co-founders Mahmud Kamani and Carol Kane — both plan to remain as executive directors with responsibility for future strategy and creative direction.
That’s not so bad
It may simply be that Kamani and Kane want to ease back slightly after years of intense work. The company’s recent results suggest growth remains strong, and I don’t see any obvious problems.
Boohoo is investing in the infrastructure required to support global sales of £3bn — more than three times current levels. I wouldn’t be surprised if it hits this goal. Sales rose by 84% in Europe, except UK, and by 72% in the US, during the first half of the year.
Revenue in each of these much larger markets is less than a third of UK sales. This suggests that there’s still a lot of room for growth.
Boohoo shares look expensive on 58 times 2019 forecast earnings. But sales are expected to rise by 38-43% this year, and by 25% per year over the “medium term.” I’d continue to hold unless problems emerge.
A super growth stock?
Another stock that’s so far managed to avoid a sell off is survey data and analytics firm YouGov (LSE: YOU). The firm’s share price was almost unchanged after Tuesday’s results, suggesting that the figures delivered exactly what investors were hoping for.
The headline numbers certainly seem good. Sales rose by 9% to £116.6m, while adjusted pre-tax profit was 42% higher at £23.3m. Shareholders will enjoy a 50% dividend increase to 3p per share, although the yield remains negligible at 0.6%.
More expensive than it seems?
I think the ‘true’ valuation of this stock may surprise you. As my fellow Fool Graham Chester has explained, YouGov’s adjusted profits are calculated so that they ignore much of the cash spent on software development.
I’m not convinced by this policy and prefer to look at the firm’s statutory profits, which show that actual pre-tax profit rose by 49% to £11.8m last year. You’ll notice that this is an impressive increase, but that the pre-tax profit figure is less than half the adjusted figure of £23.3m.
In my view, this figure provides a more realistic view of profitability. And, although I think that YouGov is a good quality growth business, I’m not tempted by the stock’s valuation of 61 times earnings.
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Roland Head 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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