Are ASOS plc and CloudTag Inc the most overvalued shares in the market?

Shares of online fashion retailer ASOS (LSE: ASOS) and wearable technology firm CloudTag (LSE: CTAG) have been soaring this year. Are their elevated prices justified or are these the most overvalued stocks in the market?

Clothes PEG

ASOS today released impressive results for its financial year ended 31 August. Revenue increased 26% to £1.44bn and underlying earnings per share soared 43% to 61.9p, comfortably beating analysts’ consensus forecast of 57.7p.

Sales momentum strengthened across all regions as the year progressed, and chief executive Nick Beighton said: “The pace at ASOS is continuing in the new financial year, which we are looking forward to with confidence.”

The shares have moved lower in early trading, which I put down to profit-taking after a very strong run in recent months.

ASOS’s growth is entirely self-funded — cash on the balance sheet increased to £173m from £119m over the course of the year — and this is a business I very much like. Indeed, I’ve written about it positively several times in the past.

The last article I penned was in April when the shares were at 3,370p. The forecast price-to-earnings growth (PEG) ratio for 2016/17 was 1.2, which I reckoned represented reasonable value for a company with a long ‘growth runway’ ahead.

However, at a current price of 5,150p, and based on company top-line growth and margin pointers, I calculate the PEG is now around 2.1. This is high enough to persuade me that the price has outstripped value. As such, I’d be looking for a lower entry point — and I’d be hopeful of getting it too, because historically ASOS’s overall growth trajectory has been punctuated by the odd setback and sharp price correction.

First revenues?

CloudTag joined the stock market in March 2013, with management expecting the company to launch its first product and “begin generating revenue in Q2 2014.” Q2 2014 came and went with no revenue generated. Ditto H2 2014 … and FY 2015 … and H1 2016.

On 25 January this year, CloudTag announced a deal with a UK/EU distributor for “a minimum of $5.2m of device sales” by 31 December 2016, with the distributor obliged “to place minimum orders during each quarter in 2016.”

There have been no minimum quarterly orders placed, and last month CloudTag found it advisable to “clarify” the nature of the agreement. It turns out that the minimum $5.2m sales by the end of the year isn’t guaranteed, but merely a “target,” which “the board is currently optimistic … will be achieved but there can be no certainty of this.”

It’s to be hoped that no similarly disconcerting clarification is required to an August announcement of “Bbnding Heads of Terms Signed with US Partner … currently being drafted into a final form agreement.”

I’m amazed at the enthusiasm with which investors have been piling into CloudTag. The share price has increased more than eightfold, from 2.13p prior to the 25 January announcement to 17.13p at yesterday’s close. Furthermore, partly because the company has issued so many new shares during the period, the valuation of the business has increased 14 times, from £4.5m to £62.8m.

Given CloudTag’s history as a serial misser on first revenues, I really don’t see this year’s news flow as compelling enough to merit such a valuation. In my view, the risk of a share price crash on disappointing or delayed revenues is relatively high. So, I’m steering clear of the stock.

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G A Chester has no position in any shares mentioned. The Motley Fool UK owns shares of and has recommended 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.