This week saw the start of yet more rumours that ASOS (LSE: ASC) could become a bid target for global online retailer Amazon (NASDAQ: AMZN.US). Of course, Amazon has been deemed a potential suitor for ASOS for a couple of years now, as it seeks to increase its exposure to consumer products outside of books, DVDs and technology.
Furthermore, with shares in ASOS having fallen by an incredible 67% since the start of the year, it could be concluded that they now offer great value for money and that Amazon will, therefore, look to buy a stake in the online fashion retailer. However, that may not be the case. Here’s why.
Stage Of Development
Although ASOS has been around for a number of years and has a very efficient and sound UK supply chain and logistical presence, its global footprint is less well developed. Indeed, the company only recently expanded into China, for instance, and is facing a number of logistical issues that require further investment.
So, while ASOS undoubtedly has the potential to succeed outside of the UK, it is still in a relatively early stage of development when it comes to infrastructure. As a result, Amazon may be less likely to bid for ASOS, as it may be seeking a partner with a global footprint that is already up and running.
Valuation
While shares in ASOS are now much cheaper than they were at the start of the year, they remain hugely expensive. Indeed, they currently trade on a price to earnings (P/E) ratio of 50.1. On the face of it, this is an extremely high valuation but, when a lack of growth over the next couple of years is taken into account, it seems excessive.
Certainly, ASOS has the potential to expand and become successful outside of the UK, but there is also a relatively high risk that it may not pull it off. As a result, it is less likely that Amazon would buy ASOS right now and may prefer to wait for either a lower valuation or a more certain future.
Looking Ahead
So, while ASOS has delivered very disappointing share price performance so far this year, things could get worse for investors before they get better. Although a bid from Amazon (or another company) cannot be ruled out, the current situation in which ASOS finds itself appears to lack appeal.
It is very expensive, lacks short term growth and requires considerable investment in its non-UK operations. Therefore, it seems to be worth avoiding right now.
