Shares in ASOS (LSE: ASC) have performed well recently. Since their stock market crash lows of around 1,000p, they’ve risen about 430%. Meanwhile, over a 12-month time horizon, they’re up about 60%.
Looking ahead, I believe ASOS’s share price has the potential to keep rising. Here are a few reasons I’m bullish on the stock.
ASOS: poised for long-term growth
The first reason is the online fashion market looks set for big growth in the years ahead. As a result of Covid-19, the shift to online shopping in the fashion space has accelerated.
Last week, analysts at Bank of America (BoA) said that 2021 is on track to become another “killer year” for online retailers. It believes last year’s pandemic-driven growth is just the beginning of the growth story. And BoA expects revenues across the online retail companies it covers (including ASOS) to more than double between 2020 and 2025, to £38bn.
“We believe these businesses are not simply pandemic beneficiaries, they are structural winners,” BoA analysts wrote. “The pandemic seems to have irreversibly accelerated changes in consumer behaviour,” they added.
In another research note last week, analysts at Credit Suisse said consumers today tend to prefer ‘multi-brand’ websites. These kinds of websites make life easier for shoppers because they don’t need to have dozens of apps on their phones and re-enter payment and contact details on each one. This is encouraging for a company like ASOS which sells a wide range of brands.
ASOS shares: bullish sentiment
I’m also very encouraged by the analyst sentiment towards ASOS shares at present. Recently, a number of brokers, including JP Morgan, BoA, and Credit Suisse have upgraded their price targets significantly. The latter’s is more than 30% above the current share price.
It’s worth noting that analysts at BoA even gave the stock a ‘double upgrade’ recently, lifting it from ‘underperform’ to ‘buy’. “Looking forward, we think ASOS should see a tailwind to order volume growth as the world normalises,” its analysts wrote.
Low valuation vs Zalando
Finally, the valuation on ASOS shares isn’t stretched, in my view. Currently, the business has a market-cap of £5.1bn. That means the forward-looking price-to-earnings (P/E) and price-to-sales (P/S) ratios are 36 and 1.3 respectively.
By contrast, rival Zalando has a market-cap of approximately £22.3bn. Its P/E and P/S ratios are 86 and 2.4 respectively.
Comparing the two online retailers, ASOS looks undervalued.
Of course, there are risks that could derail the momentum that ASOS’s share price has right now.
One risk is the threat of competition. Rival Boohoo is currently growing at a fast pace and, like ASOS, is making key acquisitions. Amazon is also capturing market share in the UK online fashion space.
There could also be complications with the integration of ASOS’s recently acquired brands (Topshop, Topman, and Miss Selfridge). If there are setbacks here, it could hit the share price.
ASOS share price: I think it’s going higher
Overall however, I think the outlook for ASC shares remains favourable. In the next few years, I expect its share price to climb much higher.
Edward Sheldon owns shares in ASOS, Boohoo, and Amazon. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool UK owns shares of and has recommended Amazon. The Motley Fool UK has recommended ASOS and boohoo group and recommends the following options: long January 2022 $1920 calls on Amazon and short January 2022 $1940 calls on Amazon. 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.