Are ASOS plc, Ocado Group plc, AO World plc & plc Overpriced?

A look at four online retailers: ASOS plc (LON:ASC), Ocado Group plc (LON:OCDO), AO World plc (LON:AO) & plc (LON:BOO).

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

The shares of many online retailers seem to trade at dizzyingly high multiples on their expected earnings. Whilst growth in the e-commerce market continues at a fast pace, competition online is very intense and margins have been wafer thin. Traditional high street retailers are fighting back, too, by building up their presence online and offering a multi-channel experience.

A series of disappointing trading updates have hit many online retailing shares recently, as growth in sales fail to meet investors’ sky-high expectations. But unless these retailers can show that the pace of sales growth is sustainable and margins will eventually widen, these online retail shares could have further to fall.


Online fashion retailer ASOS (LSE: ASC) has been seeing its revenues grow rapidly over the past few years, but profit margins have moved in the opposite direction. The retailer’s strategy of cutting prices and investing in its global distribution capacity has come at the cost of falling profits in the near term.

The company did report an improvement that in its gross margins in the four months leading up to 30 June. Retail gross margins widened 280 basis points, as retail sales rose 20%. Although spending per customer rose, the growth in the number of active customers on the prior year slowed to just 11%.

With underlying EPS expected to decline by 3% this year, its shares currently trade at a lofty forward P/E of 70.9. Even with optimistic expectations that underlying EPS will bounce back by 25% in 2016, its shares trade at 57.4 times its expected 2016 earnings. But, as ASOS continues to expand internationally, higher stock levels and continued investment needs should keep mean costs will remain higher for longer.

Ocado Group

Recent trading at Ocado Group (LSE: OCDO) has been relatively strong. In stark contrast to the traditional supermarket chains, and despite food deflation, sales grew 15.7% in the 24 weeks leading up to 17 May. But, with margins declining, pre-tax profits actually fell 4.2% to £7.2 million.

Shares in Ocado trade at a whopping 175.5 times its expected 2015 earnings. With earnings growth likely to remain weak in the face of the intense competition in the grocery sector, Ocado’s pricey valuation does not seem to be justified.

AO World

AO World (LSE: AO) has steadily grown its market share in the major domestic appliances market in the UK and Germany, but it has yet to deliver any meaningful profits. Since its IPO, its revenue and earnings figures have for the most part fallen short of management’s expectations.

Analysts expectations have gradually been revised downwards, and it would not be too surprising if a return to profitability could be delayed further. They currently expect AO World to make another underlying loss in 2015/6, before returning to profit in 2016/7. Underlying EPS in 2016/7 is forecasted to be 1.21 pence, which means its shares are trading at 78.6 times its 2016/7 expected earnings. With such demanding valuations, its shares do seem far too expensive.

Shares in (LSE: BOO) are 28% lower over the past year and 43% lower than its 2014 float price of 50 pence. Increased marketing spend before the Christmas period at the online fashion retailer failed to deliver the sales figures that had been expected, and growth had slowed considerably for the second half of the financial year.

But, analysts are still confident that will deliver strong earnings growth in the medium term. They expect underlying EPS will grow 42% to 1.1 pence in 2015/6, which gives its shares a forward P/E of 26.4. For 2016/7, analysts expect underlying EPS will grow another 25% to 1.3 pence, which means shares in the company trade at a 20.7 times its 2016/7 expected earnings. Thus, shares in seem relatively less expensive than the shares of the other online retailers.

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 considered so you should consider taking independent financial advice.

Jack Tang has no position in any shares mentioned. The Motley Fool UK has recommended The Motley Fool UK owns shares of ASOS. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Black woman using loudspeaker to be heard
Investing Articles

3 high-dividend FTSE 250 stocks to buy right now!

The London Stock Market is packed with top high-dividend stocks to buy. Here are a handful I'm considering buying, despite…

Read more »

Woman using laptop and working from home
Investing Articles

How I’m using my Stocks and Shares ISA to generate lifelong passive income

I’m looking to build a portfolio of assets that will pay me an income in my retirement. Here’s how I’m…

Read more »

Close-up of British bank notes
Investing Articles

Is this the best time in a decade to start buying FTSE 100 dividend shares?

UK dividend yields are rising again. I reckon any time is a good time to start buying dividend shares. But…

Read more »

Smartly dressed middle-aged black gentleman working at his desk
Investing Articles

Director dealings: Rolls-Royce, Admiral, Dunelm

Director dealings can indicate whether a company's doing well. So, here are this week's biggest insider transactions at three FTSE…

Read more »

Happy young female stock-picker in a cafe
Investing Articles

I’d start investing in the FTSE 250 with these 2 stocks

Were our writer completely new to the FTSE 250, he’d buy shares in these two companies today.

Read more »

Young mixed-race woman looking out of the window with a look of consternation on her face
Investing Articles

3 reasons I’d aim to earn extra income by investing £1,000 in dividend shares

Our writer has a lot of ideas to earn extra income. Here he explains why the one he likes the…

Read more »

One English pound placed on a graph to represent an economic down turn
Investing Articles

Stocks of the week: Aviva, Antofagasta, Just Group

My 'stocks of the week' take in those that have caught my eye in one way or another. All three…

Read more »

British Pennies on a Pound Note
Investing Articles

Selling for pennies, are Rolls-Royce shares a value trap?

Rolls-Royce shares have been falling in price. But does that make them good value now? Our writer considers what value…

Read more »