Should I buy this growth stock at £10?

The ASOS share price has tumbled to its lowest price in the last 10 years. Surely at £10 per share, this now represents a growth stock for my portfolio?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Middle-aged white man wearing glasses, staring into space over the top of his laptop in a coffee shop

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Online fashion retailer ASOS (LSE:ASC) is currently trading at 966p (just under £10), and is down a staggering 75% in the last year. It’s settled at around this level for around the last month, and I think it has the potential to be my portfolio’s top growth stock beyond 2022 if I buy now, but there is plenty more to consider first.

Share price volatility

The clothing seller’s share price has been historically volatile over the past five years, reaching highs of over £76 per share in 2018, but then falling to trade at under £11 per share in 2020, as with many FTSE stocks it plunged during the first few months of the pandemic.

But over the same five-year period, income has grown by £2bn! And it’s still increasing: revenue for the first nine months of the year is up 2% when compared to the prior year.

So why the peaks and troughs in the stock price?

Well, profits have been harder to come by. Most recently, the 2021 annual figures showed a profit before tax of £177m, and a net margin of 3%. The latest expectation for pre-tax profits in 2022 is at £20-£60m, having been revised from previous guidance of £110-140m. With costs across all industries spiralling, I think it’s fair to say it can expect a squeeze on profit margins too.

When it comes to dividends, ASOS’s policy is to reinvest profits into the business, and not distribute dividends, which is a strategy it doesn’t look set on changing any time soon.

Not such a good (out)look

There are plenty of external factors that could have an impact on the short- and medium-term performance of ASOS, not least the cost-of-living squeeze in the UK (its biggest market), but two recent issues really stand out.

The decision to “suspend sales” in Russia as a result of the war in Ukraine, of course, follows the trend of many blue-chip companies pulling their business out of the country this year. But historically ASOS has done approximately 4% of its business in Russia, and the decision cost the business a reported £14m. A scare for shareholders, but perhaps not customers.

However, the clothing giant could also be about to rile up its core customer base too! The Competition and Markets Authority is said to be looking into ASOS’s ‘Responsible edit’ range following reports that some clothes do not meet its green criteria. With its target demographic being young adults, if the investigation goes the wrong way, ASOS could lose much of its environmentally conscious customer base overnight.

The naked truth

There are clear risks with being an ASOS shareholder right now, and I’m expecting the share price to continue its volatility in the short term. But ASOS still occupies a strong market position in the online fashion market and I think it has clear growth potential over the long term. On balance, I’m still keen to add to my position on ASOS whilst it’s trading at its current price.

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.

James Yianni 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.

More on Investing Articles

Investing Articles

Should I still be cautious about Rolls-Royce shares?

Rolls-Royce shares are flying. But is now the time for this Fool to open a position? Here, he explains why…

Read more »

Group of young friends toasting each other with beers in a pub
Investing Articles

Is the Diageo share price coiled to rebound?

Christopher Ruane explains why he remains bullish about the long-term outlook for the Diageo share price and would happily invest…

Read more »

Young Asian woman holding a cup of takeaway coffee and folders containing paperwork, on her way into the office
Investing Articles

How I could make a 10% yield for high passive income a reality

Jon Smith explains how he can target high passive income from top-yielding stocks, including one specific example he'd consider.

Read more »

Investing Articles

I’d buy 1,784 shares of this FTSE 100 stock to target £350 of monthly passive income

Muhammad Cheema takes a look at how British American Tobacco shares, with a dividend yield of 10.1%, can generate a…

Read more »

White female supervisor working at an oil rig
Investing Articles

1 ex-FTSE 100 stock that I think will get promoted soon

Jon Smith flags up an energy stock that used to be in the FTSE 100 and currently has strong momentum…

Read more »

Shot of a young Black woman doing some paperwork in a modern office
Investing Articles

With an 8% dividend yield, I think this undervalued FTSE stock is a no-brainer buy

With an impressive yield and good track record of payments, Mark David Hartley is considering adding this promising FTSE share…

Read more »

Passive income text with pin graph chart on business table
Investing Articles

£9,500 in savings? Here’s how I’d try to turn that into £1,809 a month of passive income

Investing a relatively small amount into high-yielding stocks and reinvesting the dividends paid can generate significant passive income over time.

Read more »

Businesswoman analyses profitability of working company with digital virtual screen
Investing Articles

Dividend star Legal & General’s share price is still marked down, so should I buy more?

Legal & General’s share price looks very undervalued against its peers. But it pays an 8%+ dividend yield, and has…

Read more »