Here’s why the boohoo share price might explode

This Fool wonders if we could see fireworks from the boohoo share price in May.

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Regular readers of Fool UK probably don’t need reminding that the boohoo (LSE: BOO) share price has been in freefall for the last year. At the time of writing, it’s down almost 75% from where it stood in April 2021.

Is it ridiculous to suggest that the value of this one-time market darling might be set to explode? Not necessarily.

Reasons to be… optimistic

The first reason for thinking that a strong recovery is on the cards is that trading will meet and — whisper it — possibly even beat expectations when full-year numbers are announced on 4 May. After all, the business already hit (revised) guidance in its last update. Even a slightly lower-than-expected returns rate could be enough to increase demand for the stock.

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Should the above come to pass, the boohoo share price will likely receive a further boost from shorters being forced to close their positions. As things stand, the fast-fashion giant is the second most hated stock after the debt-ridden disaster zone that is cinema chain Cineworld. If traders have become too pessimistic (and that’s a big ‘if’), a double-digit percentage rise on the day wouldn’t surprise me.

Of course, there are other, more general things that might serve to support the boohoo share price. Some kind of resolution to the awful conflict in Eastern Europe might revitalise consumer confidence, for example.

Caution advised

As a shareholder, I can’t say I’ve enjoyed the last 12 months or so. Is my search for reasons why the share price might recover just an attempt to cheer myself up?

Perhaps. From the rise in the cost of living (and subsequent reduction in discretionary income) to supply chain hold-ups to the threat of domestic and international competitors, there’s certainly no shortage of headwinds to make me question whether this is a case of hope overriding reason. To be clear, there’s no rule to stop the boohoo share price from falling further.

A better business

That said, I would feel infinitely more comfortable buying today rather than when the stock was over 400p a pop almost two years ago. Although trading was great back then, this came before concerns arose about the working environments at its suppliers.

To its credit, boohoo does appear to have made progress on improving its corporate governance. Regardless of sales, this is a fundamentally better run business than it was two years ago.

Moreover, it still boasts many of the characteristics I look for in a growth stock. These include a large portfolio of recognisable brands and consistently solid returns on capital. It also possesses social media savvy and numerous opportunities for growth. Despite taking a hit recently, the company’s financial position continues to look pretty robust.

Too cheap?

And then there’s the valuation. The stock currently trades at a consensus 16 times forecast FY23 earnings. Whether I’m right or wrong about boohoo’s share price rising in the near future (and no one can know this for sure), this already looks cheap, considering none of the current issues strike me as permanent.

As tricky as it is to keep the faith, I remain convinced that boohoo is only temporarily out of favour. Primed to explode or not, I’d be prepared to top up my holding today.

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Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Paul Summers owns shares in boohoo group. 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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