In the months following the March stock market crash, the ASOS (LSE: ASC) share price has been on a tear. Its meteoric rise has massively outperformed the wider market and subsequently, has prompted fears over an inflated valuation. With that in mind, is now a good time to buy shares in ASOS?
Wild share price ride
After reaching an all-time high in February 2018, investor sentiment towards the business significantly deteriorated. However, this wasn’t a new experience for the company. Back in February 2014, ASOS’s valuation reached a similar peak before tumbling 77% in the following months.
Founded in 2000, the online fashion and beauty retailer primarily targets a young adult audience. Over the years, the business has grown substantially, with the company’s website now selling over 850 brands as well as its own label.
The impressive growth of ASOS is reflected in its share price appreciation. Despite the various peaks and troughs, those who bought the shares on day one would currently be sitting on around a 14,066% profit.
With the shares down 55% from all-time highs, it’s evident that there could be a long-term buying opportunity here. But what about the company’s more recent performance?
The online-only retailer was naturally in a better place to ride out the pandemic than other businesses. Having no physical stores meant that the effects of worldwide lockdowns would most likely be minimal. Consequently, the company could focus its efforts on maintaining online revenues without worrying over the impact caused by store closures.
A trading statement for the four months ended June 2020 suitably illustrates this. ASOS achieved a steady improvement in sales growth along with materially higher levels of profitability and cash generation. Total group revenue and retail sales both grew by 10% in what encapsulates an impressive performance amidst a global pandemic.
That said, it’s worth noting that international sales predominantly drove the figures higher, with UK and US sales falling by 1% and 2% respectively. As a result, some analysts remain unimpressed by the update.
Regardless, the company expects full-year profit to be towards the top end of market forecasts after a positive four months. What’s more, ASOS will continue to repay the support it received via the furlough scheme to the UK government.
Looking ahead, it seems too soon to say what the impact of Covid-19 will be on the business. Despite the fact that ASOS is undoubtedly better positioned than many of its competitors, it still faces challenges in the long run.
For example, the group carries a substantial amount of debt, meaning that if profits struggle, servicing interest payments will become considerably more difficult. Overall however, the company’s balance sheet remains in reasonable shape.
A key factor in the continued prosperity of the underlying business will be the retailer’s ability to continue expanding its consumer base. With the company’s mission “to become the world’s number-one online shopping destination for fashion-loving 20-somethings,” the news that its active consumer base increased by 16% year-on-year will be encouraging.
Ultimately, a 12-month forward P/E ratio of 65.9 is hardly appealing to value investors. That said, if the online fashion market continues to boom and the company can successfully carry on growing earnings, the future looks bright in my eyes. As such, now could be an ideal time to buy into the ASOS share price.
Matthew Dumigan has no position in any of the shares mentioned. The Motley Fool UK has recommended ASOS. 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.