Is the ASOS share price set for explosive growth?

The ASOS share price collapsed in recent years. But 2023 is off to a cracking start, as the fashion firm’s turnaround gains strength.

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A lot of UK stocks have made good starts to 2023. But few have taken off as strongly as the ASOS (LSE: ASC) share price, up 83% since the start of the year.

To put that into perspective, we are still looking at a 56% fall over the past 12 months. And ASOS shares have lost a whopping 87% of their value in five years. It’s some comedown for a high-flying growth stock whose price-to-earnings (P/E) ratio has previously peaked at over 100.

Still, ASOS has had some serious booms and busts in its time. And previous slumps have typically turned round into soaring bull runs. I think it’s all about valuation. And if the shares are cheap now, I wonder if they could be primed for an explosive 2023.

ASOS posted negative earnings for the year ended August 2022, and forecasts suggest a loss in the current year too. That makes the P/E meaningless at the moment, but the City does expect profits to return in 2024. P/E values would come in under 20 if analysts are correct, which I think looks decent for the resumed growth potential I see.

Cash flow

For the four months to 31 December, total revenue fell 6%. As well as a general economic pain, the company suspended trade with Russia in March 2022. Excluding Russia, like-for-like sales fell only 3% from the previous year, which is a bit better.

It looks like the outlook for the second half of 2023 is going to be key for ASOS. The board still expects first-half cash flow to be modestly negative. But it did say it “continues to expect significantly improved profitability and cash generation in H2 FY23 and beyond, following H1 FY23 loss“.

Turnaround

For many investors, me included, that’s the key turnaround point in any recovery. It’s all very well seeing turnover, and even paper profits, but if a company has debts and is suffering from cash outflow, it simply has to turn the cash flow direction around.

The balance sheet does carry some debt. At the August year-end in 2022, net debt stood at £153m. But considering turnover levels, and what I see as the long-term profit potential, I don’t think that’s too bad. The previous year ended with net cash of £200m, so it’s a relatively short-term thing, so far.

Short selling

It’s not wise to read too much into short-term share price movements at the best of times. And some of the recent strength will most likely be down to the heavy short selling positions that some bearish investors have built up.

When a stock like ASOS starts to move up, some short sellers will be forced to buy to settle their positions. It’s known as a short squeeze, and it can accelerate a share price spike.

I’ll watch the short position at ASOS as we head further into 2023, and I expect more short-term volatility. But for the long term, I reckon growth share investors could be getting back on board.

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.

Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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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