Has the ASOS share price bottomed?

After a massive fall, ASOS shares have started to edge back. Edward Sheldon discusses whether the stock has now bottomed.

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Shares in online fashion retailer ASOS (LSE: ASC) have experienced a spectacular fall recently. Earlier this month, the company’s share price hit 1,250p – about 75% below the level it was at 12 months ago.

Yet recently, the stock has rebounded a little and moved back above 1,450p. This begs the question, has the ASOS share price now bottomed?

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Three reasons ASOS shares could rise from here

Looking at ASOS shares today, I think there’s certainly a chance they’ve bottomed.

One reason I say this is that the stock has fallen a long way. If we ignore the lows hit during the early stages of the Covid-19 pandemic (when markets were in total meltdown mode), the stock has declined to levels last seen in 2012.

That fall seems a little excessive to me. In FY2012, ASOS generated revenue of £553m. For FY2022, analysts expect the group to generate revenue of £4.2bn.

Another reason is that the stock now looks very cheap. After the recent share price fall, ASOS now has a market cap of just £1.4bn. That means its forward-looking price-to-sales ratio is just 0.33. Meanwhile, with analysts expecting the group to post earnings per share of 70.9p this year, the forward-looking price-to-earnings (P/E) ratio is under 20. That’s very low for this growth stock.

Additionally, operating conditions should start to get better for the group at some stage in the near future. Compared to last year and the year before, people are going to be socialising a lot more this year. This should result in higher demand for clothing. At the same time, supply chain and cost issues could start to improve. This would help profitability and boost earnings per share.

Three reasons the share price could keep falling

Having said all that, there’s also a chance the share price could keep falling.

One thing that’s worth highlighting here is that short interest is relatively high at 7.1%. This indicates that short sellers (hedge funds and other sophisticated investors) expect the stock to fall further. I don’t like to bet against the short sellers. Because more often than not they’re right. However, it’s worth pointing out that if ASOS was to post some good news, short sellers might rush to close their positions, pushing the share price up.

Another issue is that broker sentiment is poor. At the moment, analysts are downgrading their earnings estimates. For example, over the last month, the consensus earnings forecast for the year ending 31 August 2022 has fallen by 4.3p. Meanwhile, analysts at Jefferies recently cut their target price from 4,050p to 2,440p. This kind of broker activity could put pressure on the share price.

Finally, there is a bit of uncertainty here due to the economic environment. If consumers cut back their discretionary spending in the second half of 2022, it could have an impact on ASOS.

My view on ASOS

Ultimately, it’s hard to know if the ASOS share price has bottomed yet. In the near term, there are reasons to be bullish and also reasons to be bearish.

Having said that, I’d be comfortable buying ASOS shares for my portfolio today. I continue to believe the long-term growth story here is attractive, and at the current valuation, I see a lot of value on offer.

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Edward Sheldon has positions in ASOS. 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.

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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