Boo Hoo (LSE:BOO), the online fashion giant known for its trendy styles and targeted marketing, has been going through a period of ups and downs in recent years. Once a stock market darling, boohoo’s share price has fallen by more than 20% in the last year alone. But is this a sign of a sinking ship or a buying opportunity for savvy investors?

What’s going on?

Analysts are divided. While the company has undoubtedly faced challenges, some see reasons to be interested in the company.

boohoo’s recent woes can be attributed to a confluence of factors. In November 2023, the company issued an earnings warning, citing slowing consumer spending and rising costs. The core demographic, newborn adults aged 16 to 45, was reportedly feeling the pinch of inflation and cutting back on discretionary spending such as clothing.

Moreover, the brisk fashion industry itself has experienced other major difficulties in recent years. Consumers are becoming more and more environmentally conscious and are turning to sustainable clothing instead of brisk fashion. Boohoo’s business model of mass-producing fashionable clothing at low cost may not appeal as strongly to the up-to-date wave of eco-conscious shoppers.

As a result, the share price has fallen by more than 85% in the last five years.

Signs of hope

Despite the bleak situation, there are reasons for cautious optimism. First, analysts predict annual earnings growth of as much as 80% in the coming years. While there are still no signs of profits in the foreseeable future, the long-term investor could be rewarded if this trend continues.

Secondly, the company is adept at using social media and influencer marketing to reach its target audience. In the ever-changing retail landscape, this could be a huge growth area.

The third and most captivating factor for me is the potential valuation. A discounted cash flow calculation suggests the company is undervalued by approximately 34%. While this isn’t a guarantee, with so much potential, I think it’s worth digging deeper into the balance sheet.

Currently, debt levels appear to be under control. There is also a solid cash reserve available, but as the industry has shown in the past, in the wrong environment, such resources can disappear very quickly.

The risk remains

Before you jump on the bandwagon, it’s crucial to acknowledge that the company has been plagued by a lot of concerns in recent years. There have been accusations of destitute working conditions in the supply chain. These controversies can damage a company’s reputation and seriously discourage consumers who value ethical practices.

Moreover, boohoo faces stiff competition from established players such as ASOS and emerging rivals like PrettyLittleThing. The online fashion market is a crowded one, and boohoo will need to innovate and adapt to stay ahead of the competition.

Do I buy?

The potential enhance in the boohoo share price is certainly tempting. However, please remember that this is just a calculation and the share price could easily drop even further.

For long-term investors who believe in the company’s ability to meet challenges and adapt to the changing retail landscape, the current share price may be an attractive entry point. However, I am still not very confident that they will be resolved any time soon. I’ll keep it clear for now.