All too often I find myself writing about traditional (perhaps old-fashioned) bricks and mortar businesses, with brands going back decades, having to adapt to the times and move online — somewhat ironic really given that the online times I speak of have, of course, been here for 20 years.
The other side of this, is all about those firms that are entirely online and relevant today, with strong brands that appeal to a younger audience that has only ever known the internet-era. The two best examples I can think of are online fashion retailers ASOS (LSE: ASC) and Boohoo (LSE: BOO).
The problem for potential investors, though, is that I am not the only one who knows this. Both companies have been touted as prime examples of modern online successes for the past few years, and have seen demand in their respective shares climb accordingly.
This may now mean, unfortunately, that the strength of both companies may actually already be priced in to the stock, if not over-priced in to it, leaving anyone interested in them being in the position of perhaps having missed the boat.
Prime evidence of this is the muted reaction to Boohoo’s half-year results this week. Despite the company seeing a strong performance across the board, the share price actually dipped a little before simply returning to previous levels.
This is a paradox I have seen in the market before. Good results themselves are not really seen as good unless they beat expectations. While you have ‘official’ expectations from banks and fund managers, traders and investors alike start to have expectations of their own – usually meaning that they expect even better results than the good numbers predicted in the first place.
This leads us to the situation Boohoo just suffered – the company posted sales of £565m for H1, beating estimates of £540m, while EBITDA came in at £60.7m, beating estimates of £56m. The result? The price dips of course, before edging its way back.
I agree with my colleague Kevin Godbold that even this better-than-expected result was already in the price. With a forward-looking earnings multiple at 40, I just can’t help but think that Boohoo shares are perhaps topped out for the foreseeable future.
Rival ASOS may be in a similar situation despite seeing price declines. Its recent troubles with warehouse disruptions have hit its finances and shares alike. While this may seem like a dip-buying opportunity, as I think these issues are most likely short-term problems, the stock still seems like it may have peaked.
ASOS offers no dividend, and even with the latest price declines, the stock has a forward-looking P/E ratio of 74 – expensive all things considered. Having seen a high of almost £80 a share in 2018, and still standing at the £24 mark, I just can’t help but see ASOS stock as overbought.
As online retail becomes the mainstay of the old bricks and mortar stores, competition could drive earnings lower. Meanwhile as an investment prospect, endless high growth may become a thing of the past for these two. It is just possible, that for Boohoo and ASOS shares, their best days are behind them.
Karl has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended ASOS. The Motley Fool UK has recommended boohoo group. 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.