Despite huge gains early in its life, ASOS (LSE: ASC) has seen its shares fall 9% over the past five years. Though the company pioneered the online fashion business, its share price has had a very volatile ride.
I’m a bit surprised to see how badly ASOS shares fared in the early days of the Covid-19 pandemic. High street fashion came to a complete standstill during the lockdown, with share prices tumbling across the board. The Next share price, for example, fell 53% at its lowest point. And even Associated British Foods, the owner of Primark, slumped by 40%.
But online sellers should handle the pressure better and not suffer such huge falls, right? Wrong. By the middle of March, the ASOS share price had plunged by a massive 70%. But an announcement on 7 April dispelled fears that ASOS faced any serious liquidity pressure. As a result of stress testing, the company assured us there was “sufficient liquidity within our existing £350m facility“.
Don’t panic, liquidity is fine
ASOS went on to say it was “close to finalising a potential equity issuance and extension to its debt facilities“. Maybe the shares were priced to go bust, but it certainly doesn’t sound like that’s going to happen.
The same day, ASOS released interim results showing a 21% surge in revenue to £1,597m. That is only to the end of February, so it doesn’t really get into the lockdown. But along with the liquidity news, the day proved to be a pivot point. Since then, the ASOS share price has trebled in value. If you’d bought when the price was down, as my Motley Fool colleague Edward Sheldon did, you made a very good choice.
How soon will ASOS be back to growth?
But what now? Is it too late to get in on the act, or is the ASOS share price still on a growth trajectory? There’s a modest pre-tax loss on the cards for the current year. And that’s followed by forecast earnings per share (EPS) next year of half the level achieved in 2018. It suggests a price-to-earnings multiple for 2021 of close to 70, which is high, even by growth share standards. And I’ve been seriously put off by levels like that in the past. But I think it’s misleading.
Will ASOS get back to its 2018 profit level? Yes, I’m sure it will, and fairly soon. And then I think we’ll see profits rising year after year. The online fashion business is well proven now, and it is resilient in the face of crises like the current pandemic. In short, I still see considerable profit growth for ASOS, in the UK and worldwide.
The ASOS share price is surely cheap now
Even EPS in line with 2018’s would drop the P/E, based on today’s share price, to 34. And while that’s more than twice the long-term stock market average, I don’t think it’s stretching for a growth stock. Certainly not one with the potential of ASOS. I’ve been negative on ASOS in the past, but I now rate it a long-term buy.
