How Low Can ASOS plc And Blinkx Plc Go?

ASOSASOS (LSE: ASC) and Blinkx (LSE: BLNX) used to be two market darlings, which seemed unstoppable as growth exploded and their shares surged higher. However, after several profit warnings and an almost continual stream of bad press, the companies are now some of the market’s most controversial stocks.

And after declining 68% and 82% respectively year to date, the question is, how much lower can ASOS and Blinkx go?

Growing competition

One of ASOS’s biggest problems is the fact that the company is losing market share to other online rivals. As a result, the company is having to discount its clothing heavily to compete and continue to hit sales targets.

It’s easy to see how this is having an effect on ASOS. In the year to 31 August ASOS’s gross margin declined by 230 basis points, compared to the year ago period. During the third quarter alone, ASOS’s gross margin contracted by 640bps, compared to the year ago period.

What’s more, it has emerged over the past few weeks that some of ASOS’s suppliers have become frustrated with the company’s discounting. Some suppliers have threatened to pull their products from the retailer’s website, after claiming that ASOS’s discounting was pushing their brands down market.  

Dark clouds

As ASOS struggles with competitors, Blinkx is still trying to shake off the damaging allegations made about its business model on an online blog. These allegations criticized the company’s “outsized success”.

Unfortunately, even though the comments made within the blog remain allegations, and nothing more, Blinkx’s reputation has suffered. This has had a knock on effect on the company’s trading. For the first half of the financial year, Blinkx’s trading came in significantly below expectations. Management blamed this slowdown on “industry-wide issues of efficiency and effectiveness…compounded by the lingering effects of the disparaging blog about the Company”.

Heading lower

As ASOS and Blinkx struggle with factors outside of their control, it’s likely that the two groups could see their shares fall further as investors fret about uncertain futures.

Still, after Blinkx’s recent declines the company now looks attractive on a valuation basis. Indeed, even though earnings per share are expected to fall 27% this year, the company trades at a forward P/E of only 12. Nevertheless, City analysts expect Blinkx’s earnings to fall further the year after, which means that the company is trading at a 2016 P/E of 15.8. 

ASOS, on the other hand, looks expensive at current levels. At present levels, and even after recent declines, ASOS trades at a forward P/E of around 49, which seems expensive for ASOS’s faltering growth. There’s no doubt that ASOS’s lofty valuation may put some investors off.

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The Motley Fool owns shares in ASOS.