Last week’s calamitous crash in the ASOS (LSE: ASC) share price showed new investors just how brutal the stock market can sometimes be. Can the AIM-listed, online fashion giant’s stock now be considered the bargain of 2021? Here’s my take.
ASOS share price: a warning…
Let’s start with a bit of context. In terms of trading, ASOS has been one of the few real beneficiaries from multiple UK lockdowns. With no stores to browse, it was predictable that young consumers would gravitate towards the company’s website for their fashion fix.
For a while, sales were buoyant as people stocked up on less formal gear to make it through working from home. The ASOS share price did very well too. It rose from a low of 1,060p in April 2020 to just under 6,000p a year later. That’s an incredible gain of over 450%!
The problem is that momentum such as this can’t last forever. When news of slowing sales came last week, it was equally inevitable that some investors would be unhappy.
Another thing that may have exacerbated the fall in the ASOS share price was its relatively small ‘free float’. This is the percentage of a company’s stock that’s available to trade on the stock exchange. For ASOS, this sits at a little less than 70%, according to Stockopedia. Most companies of its size have free floats nearer 100%. In practice, this can make moves up or down more violent.
…or an opportunity?
There’s another way of looking at this. Will any of the setbacks mentioned in last week’s update still be relevant in, say, five years? I’d be surprised.
Yes, Covid-19 is proving a stubborn beast to beat. However, two-thirds of adults have now received both jabs in the UK. While an increase in infections is very likely as all restrictions are removed, Boris Johnson appears committed to his belief that there’s no turning back now. Supply chain pressures should also be transitory.
On top of this, ASOS’s growth strategy should have borne fruit by then. Let’s not forget that the firm recently acquired brands such as Topshop and Miss Selfridge. These should complement organic growth and help increase the company’s share of its target market here and abroad.
Having tumbled last week, shares in ASOS now trade at 26 times forecast earnings. That’s still nowhere near the sort of multiple that would get value investors salivating. However, it’s a much lower valuation than ASOS has previously traded at. Moreover, investors shouldn’t compare an online giant with, say, a struggling airline or energy provider.
Sure, things could be tricky for a while. The mooted online sales tax would be another headwind for the company. Even so, this is very much a ‘known’ risk and one management has no doubt factored into its planning.
So, while suggesting that the ASOS share price crash now makes it the bargain of the year may be taking things too far, I do think Thursday’s reaction was overdone. I therefore consider this a great opportunity for me to build a position in a company that’ll likely be worth far more than £4bn in a few years.
The time to buy stock in a quality growth story is when the momentum jockeys have temporarily jumped off. I think that time has arrived here.
Paul Summers 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.