It’s no secret that online retail has been one of the biggest winners emerging from the pandemic. At the high street’s expense, e-commerce stores have been booming with many of us mostly confined to our homes under lockdown restrictions.
This is a trend that was very much gathering pace before Covid-19 entered our lives. The pandemic just greatly accelerated that move.
As a result, the ASOS (LSE:ASC) share price has rocketed 60% in the last 12 months. The shares have even increased 23% in 2021 so far.
But how much room does the share price have to grow from here? Here’s what I think.
Top purchase
Perhaps the biggest news to come out concerning ASOS in recent months is the acquisition of Arcadia Group brands Topshop and Miss Selfridge in a deal worth over £300m.
This acquisition does not include the physical stores. In my opinion this was a wise move by ASOS, as online retail is its expertise and will make the purchase better value for the group as a whole. The deal only strengthens the brand reputation and market share held by ASOS for online fast fashion and gives it full control over brands that were big wholesale partners.
The FTSE AIM company’s financials have been going from strength to strength throughout the pandemic. In its most recent earnings report, it said full-year 2021 pre-tax profit is set to be at the top end of current market expectations.
Asos added its “exceptional” UK growth indicated “strength of market position as well as restrictions on non-essential retail stores through the peak period“.
Crucially, it’s my opinion that ASOS’s profit growth is down to a fundamental and long-term structural change in how we shop. My thoughts are backed up by analysts at Bank of America, who recently upgraded the ASOS share price to ‘buy’ based on that assumption.
As my colleague Edward Sheldon referenced, BoA analysts said “the pandemic seems to have irreversibly accelerated changes in consumer behaviour.”
Online sales tax
As with any investment however, there is still a risk to the ASOS share price today.
The fear with any stock that rises so much over a short period of time is that it becomes overpriced or even a bubble waiting to burst. Trading with a price-to-earnings ratio of 45, the ASOS share price does seem particularly expensive at the moment. Any bad news could send it sharply downwards.
Another factor that could weigh on the shares over the next few months is the fact that the UK government said it would look to introduce an online sales tax in response to the e-commerce boom and high street decline.
Newspaper reports said Treasury officials had called technology companies and retailers to a meeting before the budget in March to discuss how an online sales tax would work.
The tax would be a way of examining the “excessive profits” being made by the likes of ASOS, Amazon, Ocado and more during the pandemic.
I will certainly keep an eye on how the situation develops with this policy. But I think the shift towards online shopping is here to stay, even after lockdown restrictions are long forgotten.
For that reason I’m bullish on the ASOS share price right now.
