The ASOS share price has crashed. Is now the time to buy?

James Reynolds looks at the recent ASOS share price action and weights up whether it signals a chance to add the retailer to his portfolio.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

The ASOS (LSE: ACS) share price dropped suddenly today on news that CEO Nick Beighton will be stepping down after 12 years. This is purportedly because ASOS has failed to meet its expected profits for August of this year. It’s now also expecting a further fall in profits going into 2022.

Beighton has blamed this on supply chain issues caused by the Covid-19 pandemic. These, as we know, are a long way away from being solved. But when I zoom out and look at the ASOS share price history, as well as the fundamentals of the business, I think that this sudden dip represents an excellent buying opportunity for my portfolio.

ASOS fundamentals

ASOS is an online retailer that focuses on the sale and manufacturing of affordable clothing. This business model comes with some benefits but a lot of risks. As an online retailer, ASOS is able to cut costs on rent and staff, two of the major expenses to any business. But profit margins for affordable fast fashion can be small, and ASOS often operates with as little as 4% net profit. This contributes to the volatility in the ASOS share price.

Share price history

The first thing I see when I look at the history of the ASOS share price is extreme volatility.

Peaking first in February 2014 with a price of 6,960p, ASOS’ stock value then suddenly dropped by 40%. After a three-year recovery it was then able peak once again in early 2018 at 7,530p. But this was once again followed by a precipitous fall.

Here, I see a boom-bust cycle caused by investor over-confidence. ASOS had been doing consistently well in the years-long run-up to these periods, but was then hit by sudden drops in revenue that scared off shareholders. I believe that the same thing is happening now.

Why I’m buying 

The fashion industry is fickle. We all need to buy clothes but no one can hope to design the best look every year.

Given that, ASOS’ fundamentals remain strong. The company has brand recognition and low overheads. It was even able to halve its debt during the pandemic and continues to have a decent price-to-earnings ratio of 13:93. This is all great news for the ASOS share price.

Now, as winter draws near, people will want to spend less time shopping outside. They will want to buy more clothes both for themselves and as Christmas presents. Given what we know about the current price of gas, I’ve been looking at their line of jumpers myself.

Why I’m not buy…yet

I will not be buying ASOS just yet. I think that the share price still has some way to fall, but I will be keeping a close eye on it. These supply chain problems are external issues (like the HGV driver shortage), rather than problems with the business model or its management. I believe we will see the ASOS share price rise once again, once these are resolved.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

James Reynolds 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.

More on Investing Articles

Growth Shares

BT shares? I think there are much better UK stocks for the long term

Over the long term, many UK stocks have performed much better than BT. Here’s a look at two companies that…

Read more »

British Pennies on a Pound Note
Investing Articles

After a 540% rise, could this penny share keep going?

This penny share has seen mixed fortunes in recent years. Our writer looks ahead to some potentially exciting developments in…

Read more »

Silhouette of a bull standing on top of a landscape with the sun setting behind it
Investing Articles

Is the S&P 500 going to 10,000 by 2030? This expert thinks so

One stock market strategist sees animal spirits taking hold and driving the S&P 500 index even higher by the end…

Read more »

Investing Articles

I’m expecting my Phoenix Group shares to give me a total return of 25% in 2025!

Phoenix Group shares have had a difficult few months but that doesn't worry Harvey Jones. He loves their 10%+ yield…

Read more »

Hand of person putting wood cube block with word VALUE on wooden table
Investing Articles

14.5bn reasons why I think the Legal & General share price is at least 11% undervalued

According to our writer, the Legal & General share price doesn’t appear to reflect the underlying profitability of the business. 

Read more »

Young black man looking at phone while on the London Overground
Value Shares

After a 16% drop, FTSE 100 stock JD Sports Fashion looks like a steal to me

This FTSE 100 stock has tanked since mid-September. Edward Sheldon believes that there's value on offer after the share price…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Is now the time to buy BP shares? Here’s what the charts say

The best time to buy shares in a company is when they’re trading at a discount. But the future is…

Read more »

Investing Articles

Here’s how I’d use £50K to aim for a million when the stock market crashes

Seeing a stock market crash as a buying opportunity could prove lucrative for a well-prepared, long-term investor. Christopher Ruane explains…

Read more »