Zalando (ETR:ZAL): Is the Market Mispricing a High ROE, Growth-Potential E-Commerce Leader?

The German e-commerce giant Zalando (ETR:ZAL) has seen its stock price plummet by 55.6% over the past five years, despite reporting robust financial metrics: 53% annual EPS growth, 6.8% revenue expansion, and a 10.48% return on equity (ROE) in 2025—outpacing the Specialty Retail sector's 9.2% average ROE. This stark disconnect between fundamentals and valuation raises a critical question: Is Zalando's stock a mispriced opportunity for long-term investors?

The Paradox of Growth vs. Declining Valuation

While Zalando's stock has languished, its operational performance tells a different story. Revenue grew at a 6.8% compound annual rate (CAGR) from 2020 to 2025, reaching €10.6 billion in 2024. Even more striking is its adjusted EBIT margin, which expanded from 1.1% in 2023 to 2.5% in 2025, signaling improving profitability. Meanwhile, the company's ROE hit a decade-low of -5.27% in 2020 but rebounded to 10.48% by 2025, surpassing its own 10-year average of 6.88%.

Yet the market has penalized the stock relentlessly. A would reveal a widening gap: EPS grew from €0.03 to €0.52 over five years, while the stock fell from a high of €40.00 in early 2025 to €27.11 by year-end—a 22.7% drop in just six months. This divergence suggests investors are skeptical of Zalando's ability to sustain growth amid challenges like rising inventory costs and competitive pressures.

Why the Undervaluation?

1. EPS Volatility: While Zalando's long-term EPS growth is strong, quarterly misses—such as a 20% EPS shortfall in Q3 2024—have spooked short-term traders. Analysts repeatedly cut estimates: consensus EPS forecasts dropped 13% in September 2023 and 11% in June 2023, amplifying uncertainty.
2. Market Sentiment: The stock was labeled “21% undervalued” in late 2023 and “20% overvalued” in early 2025, reflecting volatile investor confidence. A would show its P/E at 27.39x in 2025, well above the sector's 14x average, suggesting the market already prices in future growth.
3. Balance Sheet Concerns: Total debt reached €2.03 billion in early 2024, and the €1.1 billion acquisition of About You Holding SE (completed in mid-2025) raised fears of EPS dilution. While this move expands Zalando's market share, it could strain liquidity in the near term.

Catalysts for a Reversal

Despite these headwinds, several factors suggest now could be a strategic entry point:

1. Institutional Backing

Zalando's top 11 institutional holders—including T. Rowe Price (7.4%), BlackRock (5.8%), and billionaire Anders Povlsen (10%)—collectively own 50% of the company. Institutional ownership remains stable at 60–61%, with no major sell-offs despite short-term dips. A would highlight consistent stakes, signaling long-term confidence.

2. Strategic Acquisitions and Scale

The About You acquisition adds €320 million in annual revenue and strengthens Zalando's position in European fashion retail. While the deal may temporarily suppress EPS, it reduces reliance on third-party brands and improves gross merchandise volume (GMV). The company also aims to achieve €15 billion GMV by 2026, up from €15.3 billion in 2024, leveraging its 20 million active customers.

3. Analyst Optimism

Despite the stock's decline, analysts project 18.4% annual earnings growth and 6.8% revenue growth through 2027, with a 13.5% ROE expected by 2026. A would underscore this bullish outlook. The consensus price target of €43.00—a 54% upside from its July 2025 low—hints at a potential rebound.

Risks to Consider

• Inventory Management: Quarterly inventory rose 17% YoY to €2.013 billion in early 2025, risking overstocking and margin pressure.
• Debt Levels: High leverage may constrain flexibility during economic downturns.
• Regulatory Risks: EU antitrust scrutiny or data privacy laws could disrupt operations.

Investment Thesis: A Contrarian Play for Patient Investors

Zalando's stock may finally be pricing in worst-case scenarios. At a €8.4 billion market cap, the company trades at 27.39x forward P/E, which seems steep—but this multiple is justified if earnings growth materializes. Key catalysts like the About You integration, margin improvements, and a recovery in consumer spending could shift sentiment.

Actionable Strategy:
- Buy on dips: Accumulate shares below €30, targeting the €43 price target.
- Set a stop-loss: Exit if the stock breaches €25, signaling further pessimism.
- Hold for 3–5 years: Let the compounding of 18% annual EPS growth work in your favor.

Final Thoughts

Zalando's fundamentals—strong ROE, revenue resilience, and institutional support—suggest the market may have overreacted to short-term noise. While risks exist, the stock's valuation and growth trajectory make it a compelling contrarian bet. As the old adage goes: “Be fearful when others are greedy, and greedy when others are fearful.” For long-term investors, Zalando's current price could mark a rare entry point into a European e-commerce leader with global ambitions.