With ASOS shares down 25% in 2023, is it time to buy?

ASOS shares have been tumbling since the pandemic. Is the worst over, or is there more pain ahead for investors? Gordon Best takes a look.

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In a world where e-commerce is thriving, ASOS (LSE: ASC) shares emerged as a trailblazer in the online retail sector. With a popular range of fashion products, the company built a loyal customer base and a significant following. With shares down 25% in 2023, is now the time to buy for my portfolio, or is there further downside ahead?

How have ASOS shares performed?

Over the past decade, ASOS has seen substantial growth, transforming from a small start-up into a global retail giant. Until 2021, revenues and profits grew consistently, showcasing the company’s ability to capitalise on shifting consumer preferences.

The company has operations in over 200 countries, and it generates over half of its revenue from outside the UK. This gives ASOS a significant competitive advantage over its rivals, which are mostly focused on domestic markets.

ASOS shares have been on a sharp downward trend for several years, with rising interest rates, supply chain disruption, and negative sentiment impacting performance. ASOS has also been removed from the FTSE 250.

Is the worst over?

Following the pandemic, the company is facing growing competition from other online retailers, such as Amazon, in addition to high street favourites. These rivals generally have deeper pockets and more resources than ASOS, which could put further pressure on the company’s margins.

ASOS is uniquely exposed to changes in consumer tastes. If fashion preferences change, ASOS could see its sales decline. This is a risk that all fashion retailers face, but it is particularly acute for ASOS, which targets a very narrow demographic.

The key concern I have is the combination of a very high debt level, currently higher than the entire market cap of the company. With ASOS shares also among the most heavily shorted in the market, pressure could continue to grow.

What are ASOS shares worth?

ASOS’s shares are currently trading at a price-to-sales (P/S) ratio of around 0.1 times. This is attractive when compared to the sector average of 0.3 times. When forecast earnings are considered, a fair P/S ratio is closer to 0.4 times, suggesting some potential looking forward.

However, a discounted cash flow calculation suggests the ASOS share price is 217% overvalued. This raises alarms for me, suggesting that the recent collapse in the share price may not be over.

Another major red flag for me is the dilution of shares. Shares outstanding grew by 19.3% in the last year. This means that investors have lost value in their holdings as the company looked for further investment.

Analysis of a company which is not yet profitable can be a challenge though. With earnings growth forecast to be a massive 97% over coming years, profits are expected. If the company gets debt levels onto a sustainable path, and profits are achieved consistently, investors in ASOS shares may be rewarded.

Am I buying?

ASOS is an online retailer with a strong track record. However, the company faces some major risks, such as competition and negative sentiment. I would not feel comfortable taking on these risks in my portfolio, at least until I see the company turn a profit. I will not be buying ASOS shares.

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.

Gordon Best 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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