Why I believe Boohoo's share price can keep rising
Between late September and early April, Boohoo's (LON: BOO) share price experienced a sizeable pullback, falling from around 265p down to 140p. That's quite some correction. Having said that, the stock did rise an exponential 900% between 2015 and mid-2017, so a correction was always likely at some stage.
Yet in the last month, sentiment towards Boohoo shares seems to have improved, and the stock is now trending upward again. Already, the shares are back at 200p. Is it too late to get on board now? I don't think so. I believe there's plenty more to come from this fast-growing online clothes retailer. Here's why.
Boohoo released full-year FY2018 results a few weeks ago, and the numbers were outstanding. Revenue surged 97% to £580m, while adjusted diluted earnings per share rose 47% to 3.23p. Of particular note was the performance of subsidiary PrettyLittleThing, which enjoyed meteoric revenue growth of 228% on the year before. When you consider that the UK clothing sector is struggling significantly, these numbers are all the more exceptional.
The numbers suggest that Boohoo clearly has a winning business model. I see the stock as a play on the millennial generation, who have an entirely different set of consumer habits to older generations. Whereas in the past, consumers might head to the high street and visit Marks & Spencer or Next for new clothes, these days, millennials are more likely to buy a fashionable new shirt or dress through Instagram while watching Netflix. And Boohoo has set itself up to capitalise on this trend. This was reinforced to me last week in central London when sharing an Uber Pool taxi with a girl in her 20s. Within 30 seconds of jumping in the cab, she was browsing Boohoo's PrettyLittleThing on her mobile. With its offering of the latest fashion trends at bargain-basement prices, all through an online/mobile platform, Boohoo is onto a winner.
Sure, Boohoo shares aren't cheap. With City analysts expecting earnings of 3.8p per share for FY2019, it currently trades on a forward-looking P/E of 53. But is that expensive on a relative basis?
Over the years, larger rival ASOS has consistently traded at high valuations. Today, it trades on a forward-looking P/E ratio of 65. Yet that hasn't stopped the stock delivering superb returns to shareholders. Over the last decade, it has gained over 2,000%.
Compared to ASOS, Boohoo has a lower P/E to growth (PEG) ratio. Using trailing earnings figures, ASOS has a PEG ratio of 3.4. In contrast, Boohoo sports a ratio of just 1.3, suggesting that the stock offers better value relative to its growth.
Given that City analysts have a price target of 248p for Boohoo, 23% above the current share price, I don't think its high valuation is a deal-breaker.
Lastly, I also like the set-up of the chart at present. While I'm no technical analysis guru, it looks to me like the short-term downtrend has been broken, meaning that the stock could continue moving upward from here.
It's important to remember that a stock like Boohoo comes with plenty of risks, given its high valuation. It's not the kind of stock you put your life savings into. However, for those with a higher risk tolerance, I believe the shares have considerable long-term potential as a growth play.
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Edward Sheldon owns shares in Boohoo.com. 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.