When it comes to which online fashion retailer has been the best performer in 2015, there is a very clear winner. That’s because, while shares in ASOS (LSE: ASC) (NASDAQOTH: ASOMF.US) have soared by a whopping 50% since the turn of the year, boohoo.com (LSE: BOO) has seen its share price slump by 30%. Looking ahead, though, does this mean that ASOS is now overvalued and that boohoo.com is cheap? Or, should you stick with momentum and buy a slice of ASOS?
In terms of their business models, the two companies are remarkably similar. For example, they both operate exclusively online, since doing so provides them with a lower cost base, and both companies embrace social media in order to appeal to their customer base of twentysomethings.
Furthermore, while ASOS and boohoo.com are both focused on the UK, the two companies are also seeking to increase their exposure to foreign markets. In addition, the two companies have strong balance sheets, appear to be financially sound and target a similar price point, too.
Where they differ, though, is their financial performance. In fact, ASOS is experiencing a rather challenging period at the present time, although its share price performance is hardly indicative of this. For example, its bottom line has fallen in each of the last two years, and is forecast to drop by another 5% in the current year. The main reason for this is an investment in pricing (otherwise known as discounting) in non-UK marketsm in an attempt to gain a foothold among consumers for whom the ASOS brand is relatively new.
Meanwhile, boohoo.com is experiencing a much more positive financial period, with its bottom line expected to rise by 43% this year, and by a further 27% next year. Clearly, this strong growth rate is doing little to improve investor sentiment in the company, although such an impressive growth rate should, in the medium to long term, cause investors to bid up the price of boohoo.com’s shares.
Where the two companies also differ is in their valuations. Certainly, boohoo.com is hardly cheap based on its price to earnings (P/E) ratio of 26.2, but ASOS trades on a much higher P/E ratio of 91.1.
Of course, if ASOS had sky-high growth forecasts then it could be worth paying 91.1 times its current year’s earnings, but even looking ahead to next year reveals that earnings growth of 26% is being pencilled in. While this is a great rate of growth, it still means that ASOS has a price to earnings growth (PEG) ratio of 2.6 versus just 0.7 for boohoo.com. As such, the latter seems to offer significantly better value for money than the former.
Although 2015 has thus far been a disappointing year for investors in boohoo.com, it remains a very appealing medium to long term investment. And, while ASOS is a superb company with a very bright future, its growth prospects appear to be fully priced in, thereby making boohoo.com the clear winner in terms of which company makes for the most appealing investment at the present time.
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Peter Stephens has no position in any shares mentioned. The Motley Fool UK owns shares of ASOS. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.