After Covid sent their valuations into the stratosphere, a lot of online retailers have crashed back down to earth. None more so, I’d say, than UK stock ASOS (LSE: ASC). It’s down 93% since 2021 and might offer me a bargain basement buying opportunity.
What happened?
Today, ASOS shares trade for 393p. They haven’t been this cheap since 2009. In between, a single share would have cost 7,008p in 2014, 7,630p in 2018 and 5,706p in 2021.
That looks like a hefty discount if I thought the stock was a good buy. If the shares recovered to that 2018 high, I’d be looking at a 19 times return on investment.
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So why did the shares drop so much? The pandemic was a factor, sure. The stock surged as everyone predicted online stores like ASOS would benefit from a big shift to online shopping. But that’s only part of the story here.
The firm has struggled with supply chain issues and rising costs of materials. Operating income fell from £190m profit to a £9m loss last year. Margins went from 4.9% to -0.2%. All this was despite revenue actually increasing.
So for this share price to truly be a bargain. I’d need to see a way out from these issues and a return to profitability.
The good news
CEO José Antonio Ramos Calamonte took the reins last year and early signs are promising. The talk is of efficiency improvements, and guidance for the second half of this year is £40m-£60m profit.
His leadership has caused a big reduction in ‘short’ interest. ASOS has been one of the most shorted stocks in the UK recently. When big institutional investors bet a stock’s going to go down, the share price often follows suit.
As late as October last year, 8.4% of all the shares were shorted. That would be the highest of any FTSE stock right now. But, it has since declined to only 1.17% – an excellent sign that things are looking up for the firm.
Debt
It’s not all good news though. A formerly strong balance sheet now has £533m net debt. That looks imposing compared to ASOS’s £448m market cap. An unmanageable debt pile is a likely culprit for why this stock still looks undervalued.
I only need to look at Cineworld for a relevant cautionary tale. The shares went into a tailspin thanks to debt. I remember thinking the cinema operator’s stock looked cheap at 25p. Well, now it’s 0.5p.
All in all, there’s good and bad here. If ASOS does turn it around, today’s share price might turn out to be a total bargain.
Is that enough for me to buy in? Probably not. There are plenty of other UK stocks that look cheap but don’t have the same issues, so those will get my attention for now.
