Will ASOS plc rise or fall after today’s update shows 30% growth in sales?

Is ASOS plc (LON:ASC) set to soar in 2017?

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Online fashion retailer ASOS (LSE: ASC) has released an upbeat trading statement for the four months to 31 December. Sales increased by 30% on a constant currency basis, with investment in pricing and proposition continuing to gain traction. All of its regions performed well and the business appears to be moving from strength to strength. But is it overvalued after its 70% gain in the last year?

A superb business model

In the UK, retail sales increased by ‘only’ 18% in what proved to be a more promotional market. This figure may seem high compared to a number of its retail peers that have struggled of late, but elsewhere in the world ASOS performed much better. For example, in the US its retail sales rose by 42%, while in the EU they were 38% higher. Both of these figures are on a constant currency basis. Therefore, when sterling’s weakness is included, they increase to 66% and 49% respectively.

In terms of customer engagement, ASOS continues to gain in popularity. For example, during the period it achieved a rise in active customers of 25%, an increase in the average basket of 2% and a 6% higher order frequency. It expects to record a rise in sales over the medium term of 20%-25% per annum. However, the reinvestment of foreign exchange and US duty benefits in financial year 2017 mean that sales of up to 30% are forecast in the current year.

Valuation

As mentioned, ASOS has soared by 70% in the last year and this puts it on a price-to-earnings (P/E) ratio of 69.5. While this may seem excessively high compared to a number of its retail sector peers, online shopping specialist Mysale (LSE: MYSL) has an even higher rating of 193. Both of these figures indicate that share price falls could be just around the corner, although in ASOS’s case that seems to be more likely.

A key reason for this is that the company’s earnings growth rate in the 2018 financial year is expected to be 28%. When combined with its P/E ratio this equates to a price-to-earnings growth (PEG) ratio of 2.5. This indicates that its shares offer little margin of safety and could fall, even if weaker sterling continues to provide a boost to its non-UK sales outlook. By contrast, Mysale is expected to record a rise in earnings of 101% next year. This puts it on a PEG ratio of 1.9 which, while still high, is more appealing than its sector peer’s valuation.

Of course, Mysale may have a sound strategy and bright prospects, but it remains relatively unattractive at a time when a number of other retail stocks have wide margins of safety. For either stock, even a minor downgrade to profitability could send their shares tumbling. Since 2017 is shaping up to be an uncertain year for the global economy, neither stock seems to be worth buying at the present time.

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 assessed. Consider taking independent financial advice.

Peter Stephens has no position in any shares mentioned. The Motley Fool UK owns shares of and has recommended 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.

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