It’s time to buy Asos
The once-pricey online fashion retailer is on sale
Few shares (or shareholders) have endured such a rollercoaster ride as those of online fashion retailer Asos (LSE: ASC). Between 2010 and early 2014, the share price soared tenfold, then fell by about two-thirds. Since then, Asos has seen several other cycles of boom and bust. It rallied during the pandemic, when analysts predicted that it would benefit from the shift towards online retail caused by the closure of brick-and-mortar stores. But as the global economy has reopened, the shares have hit another stumbling block – the price is down 70% on this time last year. Is this a buying opportunity, or does it have further to fall?
I believe it is the former. Despite the ups and downs of the Asos share price, it continues to enjoy strong sales growth. Sales have risen from £1.45bn in 2016 to £3.91bn in 2021. That works out at an increase of 171% – or 22% a year.
While some of the growth generated by the pandemic will disappear as people return to shopping in bricks and mortar shops, analysts still expect Asos’ sales to keep growing both this year and in 2023, albeit at a slightly slower rate.
Asos looks cheap relative to history
Of course, profits have been a bit more volatile than sales. Profits are expected to fall by a quarter this year, partly down to rising inflationary pressures. However, they are expected to rebound in 2023 – and again the overall trend is positive, with profits increasing fivefold between 2016 and 2021. Asos has also been able to deploy its capital efficiently, with a return on capital expenditure of more than 10%.
Asos has taken further steps to ensure that growth continues beyond the next few years. Last year it bought several key brands from the wreckage of the Arcadia Group, including Topman, Topshop, Miss Selfridge and HIIT. Not only will this help it to boost its sales and market share, but it will also benefit profit margins, compared to just selling clothes made by third parties. The company is also investing in additional warehousing and distribution capacity, something that will help it to improve service and keep costs under control.
But perhaps the most compelling reason for buying into Asos today is its valuation. Years of growth, combined with the poor performance of its shares, have transformed it from one of the most overvalued shares on the market to one that is now priced like a mature company, not one with years of strong growth still ahead of it. It now trades on only 13 times 2023 earnings, which is a very low level given its past track record. Of course, just because a share is oversold, doesn’t mean that it can’t fall further before it recovers. So, with Asos’ shares still well below their 50-day and 200-day moving averages, I’d wouldn’t immediately go long, but instead wait until they rise to over 1,800p. When that happens, I would go long at £2 per 1p, putting the stop loss at 1,305p. This would give you a downside of £990.