British online fashion retailer ASOS (LSE: ASC) shares have more than doubled in the past year. Of course, past performance is not an indication of future results. The company’s focus on young consumers helped it grow its revenues rapidly. On the other hand, the lockdown has helped to boost online sales.
A good growth stock is a must for my portfolio. I would like to understand the pros and cons of investing in this stock.
Bullish reasons to buy ASOS shares
The company’s revenue growth is strong. It grew at a compounded annual growth rate of 23% from the fiscal year 2016 to the fiscal year 2020. In the trading period for the four months ended 31 December 2020 revenue grew 24% year-over-year to £1.4bn. It was primarily helped by UK retail sales growth of 36% y-o-y to £554m.
The company has a wide range of brands and products to offer. This has helped to retain and grow its customers. As per the most recent trading report, it has 24.5m active customers. The company has a strong social media presence with over 1m Twitter followers. This is almost double that of its competitor Boohoo. It also regularly uses Instagram and TikTok to engage with its customers. The company’s efficient use of social media has helped it to become a global brand.
ASOS has recently bought four brands from Arcadia Group, including Topshop, Topman, Miss Selfridge and HIIT. Topman has more than 3.3m active customers and Topshop has 11.8m Instagram followers. The move should increase the portfolio of its own products and also increase the company’s brand value.
The management expects the fiscal year 2021 profit before tax to be at the top end of market expectations. The company has a stable balance sheet. Cash generation was also positive for the last fiscal year. This is another reason why I like ASOS shares. It had a net cash position of £407.5m at the end of the fiscal year 2020.
Risks to consider
There is a growing concern that high street stores are closing due to competition from online stores. This is definitely not a good trend for the overall economy in the long term. The government might introduce higher taxes for online-only stores in the coming months.
Also, the online retail segment is getting more competitive. The company has benefitted from the lockdown, but very soon most shops will be open. This might have a negative impact on the revenue growth of the company. The stock also had a good run in the past year. With the rise of valuations, some investors could sell to take profits.
Final view on ASOS shares
I like the company for its strong revenue growth and good profits. However, the stock has moved a lot this year. The stock is currently trading at a price-to-earnings ratio of 45 and a price-to-sales ratio of 1.7. In my opinion, the stock is not cheap, also it is a bit more attractive compared to Boohoo. I will wait to buy the stock at a lower price.
Royston Roche has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Twitter. The Motley Fool UK has recommended ASOS and 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.