The Boohoo share price has made some recovery in the past few days as investors go bargain hunting and talks of an acquisition rise. The BOO stock is trading at 87.38p, which is about 38% above the lowest level this month. Still, the shares are about 76% below the highest level in 2021.
What is Boohoo?
Boohoo is a leading company in the fashion industry. The firm sells clothes and accessories through its website and mobile applications globally. According to SimilarWeb, its website receives over 14 million visitors every month, with most of them coming from the UK. The other top markets for the company are in the United States, France, and Australia.
Boohoo generates most of its income from women. However, in the past few years, the company has been investing resources in the male category. According to SimilarWeb, Boohoo Man has over 5 million monthly users, meaning that its business is seeing substantial growth.
Boohoo was a key beneficiary of the retail apocalypse that happened during the pandemic. In 2021, Boohoo acquired the digitalassetsof Debenhams for 55 million pounds. However, analysts believe that the firm bought the company relatively cheaply. For one, its website is ranked at number 13 in the UK fashion sector with over 6 million visitors.
Boohoo was a favourite stock among many retail and institutional investors for many years. As a result, the stock managed to move from a low of 22p in 2015 to an all-time high of 432p in 2020. That was a 2,2300% increase, which pushed the company’s market cap to over 3 billion pounds.
However, in the past few months, the shares have been in a deep dive, pushing it to the lowest level since September 2016. Its market cap has also moved to about 1 billion pounds. As shown below, the shares have underperformed its peers like Next PLC and Asos. It has also lagged the FTSE 100 and FTSE 250 indices.
Why the Boohoo stock price has crashed
There are a number of factors that explain the current trend in Boohoo shares. First, the company has battled a negative public relations drama because of its working conditions in Leicester. The crisis started when a leading British paper wrote about low wages and the poor working environment in the company’s factories.
While the company initially rejected the claims, it launched an independent study that confirmed what the paper claimed. As a result, it announced that it will make some significant changes. Therefore, while the situation has largely been resolved, many investors have stayed away from the firm.
Second, the Boohoo share price has struggled in the past few months because of the multiple forward guidance news. In the past few months, Boohoo has lowered its forward guidance, citing the falling growth rate. Indeed, as shown above, the number of visitors to its website has been in a downward trend in the past three straight months.
Third, Boohoo has dropped because of the rising competition from local and international brands. In the past few months, we have seen the overall entry of other companies in the fast-fashion industry. The biggest threat is coming from Shein, a Chinese company that has become popular among millennials. As shown below. Shein has become the fourth most-trafficked website in the UK after Next, Marks and Spencer, and Asos.
Further, like all companies in the industry, Boohoo is seeing a substantial increase in the cost of doing business. Cotton price has jumped to a multi-year high while wages in the UK and other countries has risen. Data published on Tuesday showed that the UK wage growth has remanded steady in the past few months. Most importantly, the cost of logistics has remained high as the crisis in Ukraine has continued.
Another reason why the Boohoo share price has collapsed is the Federal Reserve and the Bank of England. The two banks have changed policy and have now embraced a more hawkish tone. The BOE has already made two rate hikes while the Fed is expected to raise rates on Wednesday. Historically, growth stocks like Boohoo do well in a low rate environment.
Is Boohoo a good investment?
Amidst all these, there are questions about whether Boohoo is a good stock to buy. Besides, the shares are trading at the lowest point in years. There are several reasons why Boohoo is a good buy.First, as shown in the chart below, insiders have not sold shares in the past few months despite the collapse. This is a positive sign because it sends a picture that they are confident that the stock will recover. In contrast, insiders in companies like Affirm and Peloton that have crashed lately have sold millions of dollars worth of shares.
Second, the company still maintains a relatively healthy business that is growing albeit at a slower pace. As shown below, its revenue has jumped from £295 million in 2017 to over £1.75 billion in 2021, which is a remarkable growth. In this period, its EBITDA has moved from £35.1 million to £175 million. As such, it means that it is a cheap stock since it is valued at just £1 billion.
Further, there is chatter that some private equity companies will seek to acquire it in the coming months. The idea would be to take it private and merge it with other players in the industry and then push it public again.
The daily chart shows that the BOO share price has been in a strong bearish trend in the past few months. A closer look shows that the sell-off accelerated when it moved below the key support level at 215p, which was the lowest point in October 2020. The stock has also moved below the 25-day and 50-day moving averages.
Therefore, for now, the downward trend will continue as monetary policy risks rise. However, in the long-term, there is a likelihood that the shares will recover as investors buy the dips.
