Boohoo share price vs ASOS share price: which growth stock would I buy?

Both the Boohoo share price and that of ASOS have crashed over the past year. Would I buy either of these growth stocks?

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Both the Boohoo (LSE: BOO) share price and the ASOS (LSE: ASC) share price have tumbled over the past year. Indeed, during that year, Boohoo is down over 45%, while ASOS is down just over 40%. But in the face of these massive drops, would I buy either of these fashion stocks?

ASOS: growth potential

After soaring due to the pandemic, and the shift to online shopping, ASOS has struggled over the past few months. This is due to several short-term headwinds that face the company, including supply chain pressures. Such headwinds means that sales growth is only expected to be between 10% and 15% for FY22, far slower than in previous years. Further, costs are also likely to soar.  This includes higher inbound freight costs, labour cost inflation and increases in marketing costs. As such, profit before tax is only forecast to be around £125m, a 30% decrease from this year.

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Still, despite these risks, I’m confident in the long-term future of the group. Indeed, the group is targeting £7bn worth of sales over the next three or four years, with operating profit margins of at least 4%. This is significantly higher than the £3.9bn that it recorded this year. 

Further, I feel that there’s significant demand for ASOS’s products, especially as the pandemic has further cemented online shopping as the way forward. With the company targeting growth in the US, there’s also major potential for growth over there. With £200m in net cash, slightly higher than Boohoo’s £100m, the company should also be able to pounce on any opportunities. This means that I’d buy ASOS stock at its current price and hold it for the long term.

Boohoo: supply chain issues

The Boohoo share price has also struggled and is currently at levels not seen since the end of 2018. This is despite the fact that the company saw revenues of £580m in 2018, compared to £1.75bn last year. Nonetheless, such a large fall can be attributed to a few main reasons. First, there was the ‘modern slavery’ investigation last year, in which it was found that some (not directly employed) workers in its supply chain were paid as little as £3.50 an hour.

While it’s making changes, this is likely to be at the expense of the company’s already slim profit margins. In addition, there’s significant competition from Chinese group Shein, which is forecasting £14.6bn in sales next year. This may tempt customers away from Boohoo. It’s equally a risk for ASOS. Finally, it recently reported an additional £26m charge relating to rising shipping costs, which may mean that profits are lower than expected.

But compared to previous years, the Boohoo share price looks extremely cheap. In fact, it currently trades on a forward price-to-sales ratio of 19. Last year, it traded on a P/E ratio of over 50. It’s also slightly lower than ASOS, which has a P/E ratio of around 22. As such, now may seem to be the perfect time to buy the stock. Even so, I’m staying away for the time being. This is because I worry about the firm’s poor environmental standards, which are considered far worse than those of ASOS. I believe that this could have a negative effect on the firm in the long-term.

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Stuart Blair has no position in any of the shares mentioned. 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.

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.

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