The fast fashion giant ASOS (LSE:ASC) has battled with various problems over the past year. This has been reflected in the movement in the shares. The share price is down 82% over this period, currently trading at 890p. Sometimes fear can take over in cases like this, pushing the share price down to a very cheap level. So should I be thinking about buying right now?
Bad news hurting
Even if the share price is potentially undervalued, there are clearly going to be catalysts for such a steep drop in the past year.
The latest financial results highlighted one of the major concerns from 2022 so far. The cost-of-living crisis is causing customers to be increasingly conscious about spending. The report noted that “net sales were impacted by a significant increase in returns rates in the UK and Europe”.
Spiraling costs from inflation is another point that’s hurting the business. Even though the gross margin of 44% is high, it has been declining, partly due to elevated freight costs. Ultimately, higher costs mean lower profit, unless revenue also increases at the same pace.
The company still expects to make a profit before tax of £20m-£60m for the full year. Yet this has been revised lower, causing some to be uneasy about holding the stock.
Potential value ahead
Given that ASOS is still profitable, I can accurately assess the value via the price-to-earnings ratio. Personally, any value below 10 gives me an indication that the P/E ratio is below average, and the shares could be undervalued.
ASOS currently has a P/E ratio of 6.8. One of the main competitors in this sector is boohoo, whose P/E ratio is 12.93 – almost double! From that perspective, I do think that ASOS shares could be worth buying. However, do any fundamental reasons support this view?
I do think that the business could outperform with its own-label brands. The cost-of-living crisis will likely impact high-end brands and more expensive third-party products listed by ASOS. But the cheaper own-label brands should see higher demand with cost-conscious customers. If the firm can market this appropriately then it could have a successful second half.
Overall thoughts on ASOS shares
I’ve got an optimistic view for ASOS for the rest of the year and beyond. There are clear risks that need to be appreciated, but I think most of this is reflected in the current share price. With it being down so heavily, I think further losses should be limited.
The share price might not aggressively jump back in the short run, but I think that the company is robust and has a good position in the sector. Therefore, I am keen to buy ASOS shares with some free cash at the moment.
