ASOS (LSE: ASC) shareholders have had a tough time in 2021. Since the start of the year, the ASOS share price has slumped 34%. Some of that will be down to retail markets returning to normal as we emerge from Covid restrictions.
But ASOS is still up 20% over the past two years. And it’s nicely ahead of rival Boohoo, whose shares have dipped 2% in the same period. But this year’s ASOS weakness is not just down to general trends. No, a trading statement on 15 July was received poorly and led to a sharp dip, with ASOS shares losing a whopping 18% on the day.
The shares have since slid further. But on 16 September, ASOS announced “ambitious new 2030 ESG goals“. That provided a little boost. And from September’s low, the ASOS share price has picked up 5%. That’s not massive. But if it has stemmed the recent falls, might it mark the start of a new bull run?
What is all this ESG stuff? It’s all about Environmental, Social, and Corporate Governance. ASOS says its aim is “to achieve Net Zero across the value chain, along with greater circularity, transparency, and diversity“. It covers recycling, human rights, ethics, and all that stuff that matters more and more to its customers. There’s also a target for “at least 50% female representation and over 15% ethnic minority representation at every leadership level by 2030.”
This comes at a time when Boohoo has been under pressure over employment practices and pricing transparency. It’s all admirable, and I applaud a company pursuing such worthy goals. But as a potential investor, I learn precisely nothing about the bottom line.
I get no feel for where growth is going to come from, or how margins might develop. And what kind of income stream might I one day expect, once the company matures and starts paying dividends? In fact, one question immediately strikes me when I read the announcement. How much is this going to cost shareholders?
Am I being cynical? I think realistic. Markets might like all this, giving the ASOS share price a bit of a boost. But it does nothing for my buying decisions. I am interested in one thing when evaluating a stock like this, valuation.
ASOS share price valuation
I’ve previously considered ASOS to be seriously overvalued. In the not-too-distant past, ASOS shares were regularly on P/E multiples of around 60 to 70, occasionally even higher. I know growth shares often command valuations that look ridiculously high, but eventually prove to be justified. But I’ve seen many growth stocks reach valuations like this. And almost every time, at some point in the future, the share price ends up a lot lower.
Now, after a cracking first half, which brought record results, ASOS shares appear far more reasonably valued. In the emerging post-lockdown world, the second half might not be so good. But on today’s ASOS share price, I could easily see that P/E ratio dropping below 30 by the end of the year.
I still expect growth share volatility in the coming years. But I rate ASOS a buy, and it’s in my top 10 for my next purchase.
Alan Oscroft owns shares of boohoo group. The Motley Fool UK has recommended ASOS and boohoo group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.