Both Boohoo.Com (LSE: BOO) and larger, more established rival ASOS (LSE: ASC) are popular stocks among growth investors. Both have rewarded investors handsomely in the past. For example, over the last three years Boohoo’s share price has climbed over 300%. ASOS’s share price has been a little up and down over the last three years, however, if you had bought the stock a decade ago, you would now be sitting on a capital gain of over 2,700%.
So which stock offers the best growth prospects going forward? Let’s compare the two.
Over the last three financial years, ASOS has boosted its sales at a compound annual growth rate (CAGR) of 25%. Looking ahead, analysts forecast growth of 27% this year and 24% next year. That’s certainly impressive. However, Boohoo has grown its top line at a CAGR of 39% over the last three years. Analysts expect growth of 86% and 38% this year and next.
Boohoo looks to have the edge here. But how much are investors paying for this growth? Looking at the enterprise (EV)/trailing sales ratio, ASOS currently has a ratio of 2.6 times while Boohoo has a ratio of 6.5. So while Boohoo is growing quickly, that’s reflected in the stock’s valuation.
Looking at the two companies’ earnings momentum, Boohoo appears to have the edge here too. Its earnings grew 97% last year and analysts expect 28% this year and 30% next year. ASOS’s earnings increased by 24% last year, with analysts forecasting growth of 27% and 25% this year and next.
Interestingly, that’s not reflected in the P/E ratios of the two companies. Boohoo trades on a forward P/E of 65, while ASOS is on an almost identical forward P/E of 64. Similarly, looking at the P/E-to-growth (PEG) ratios, both stocks have ratios of around three. So while both retailers trade at expensive valuations, neither is significantly more expensive than the other.
Share price momentum
While Boohoo has the stronger sales and earnings momentum, ASOS appears to have stronger short-term share price momentum.
Boohoo has suffered a sizeable correction in the last few months. Over one and three months, the stock has underperformed the FTSE All Share Index by 10% and 34% respectively. Although, on a one-year basis it has outperformed the index by 35%. The share price is now below both its 50-day exponential moving average (EMA) and its 200-day EMA, which suggests the stock has poor momentum at present.
ASOS shares have traded within a narrow range for most of the year. Over one month, three month and one-year periods, the stock has outperformed the FTSE All Share Index by 8%, 4% and 15%. The share price sits above both the 50-day EMA and the 200-day EMA, which is a healthier set-up from a technical perspective.
Best pick for 2018
Personally, both stocks look a little expensive for my liking. While both are growing strongly, their valuations leave little margin of error. However, if I had to pick one, I would most likely go with Boohoo.Com. Given that both stocks have similar P/E ratios, I would choose the smaller company for its stronger sales and earnings growth.
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Edward Sheldon has no position in any shares mentioned. The Motley Fool UK owns shares of and has recommended ASOS. The Motley Fool UK has recommended boohoo.com. 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.