The ASOS share price has crashed. Is now the time to buy?

James Reynolds looks at the recent ASOS share price action and weights up whether it signals a chance to add the retailer to his portfolio.

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The ASOS (LSE: ACS) share price dropped suddenly today on news that CEO Nick Beighton will be stepping down after 12 years. This is purportedly because ASOS has failed to meet its expected profits for August of this year. It’s now also expecting a further fall in profits going into 2022.

Beighton has blamed this on supply chain issues caused by the Covid-19 pandemic. These, as we know, are a long way away from being solved. But when I zoom out and look at the ASOS share price history, as well as the fundamentals of the business, I think that this sudden dip represents an excellent buying opportunity for my portfolio.

ASOS fundamentals

ASOS is an online retailer that focuses on the sale and manufacturing of affordable clothing. This business model comes with some benefits but a lot of risks. As an online retailer, ASOS is able to cut costs on rent and staff, two of the major expenses to any business. But profit margins for affordable fast fashion can be small, and ASOS often operates with as little as 4% net profit. This contributes to the volatility in the ASOS share price.

Share price history

The first thing I see when I look at the history of the ASOS share price is extreme volatility.

Peaking first in February 2014 with a price of 6,960p, ASOS’ stock value then suddenly dropped by 40%. After a three-year recovery it was then able peak once again in early 2018 at 7,530p. But this was once again followed by a precipitous fall.

Here, I see a boom-bust cycle caused by investor over-confidence. ASOS had been doing consistently well in the years-long run-up to these periods, but was then hit by sudden drops in revenue that scared off shareholders. I believe that the same thing is happening now.

Why I’m buying 

The fashion industry is fickle. We all need to buy clothes but no one can hope to design the best look every year.

Given that, ASOS’ fundamentals remain strong. The company has brand recognition and low overheads. It was even able to halve its debt during the pandemic and continues to have a decent price-to-earnings ratio of 13:93. This is all great news for the ASOS share price.

Now, as winter draws near, people will want to spend less time shopping outside. They will want to buy more clothes both for themselves and as Christmas presents. Given what we know about the current price of gas, I’ve been looking at their line of jumpers myself.

Why I’m not buy…yet

I will not be buying ASOS just yet. I think that the share price still has some way to fall, but I will be keeping a close eye on it. These supply chain problems are external issues (like the HGV driver shortage), rather than problems with the business model or its management. I believe we will see the ASOS share price rise once again, once these are resolved.

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.

James Reynolds has no position in any of the shares mentioned. The Motley Fool UK has recommended ASOS. 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.

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