Shares in online fashion retailer ASOS (LSE: ASC) had a bad day yesterday. When the market closed at 4.30pm, the ASOS share price was sitting at 3,854p, 18.1% below its closing price on Wednesday.
Here, I’m going to look at why ASOS’s share price tanked. I’ll also explain how I’d approach the stock now.
Why ASOS’s share price tanked
ASOS’s share price crashed yesterday after the company posted a trading update for the four months to 30 June. It’s fair to say the market was unimpressed with the update.
There were definitely some positives in the report. For example, the group delivered total revenue growth of 21% for the four-month period, including 36% growth in the UK and 20% growth in the US. Meanwhile, its customer base at the end of the period was up 1.2m year-on-year. The group also reported it had a strong cash position and balance sheet at the end of June.
However, there were certain things that spooked investors. One was the fact that the company said trading in the last three weeks of the period was “more muted” due to Covid-19 uncertainty and poor weather. ASOS noted that these conditions could persist in the near term. For the final period of its financial year (ending 31 August), it expects growth to be inline with the same period last year (15%).
Another issue for some investors was the fact that, while the company said full-year profit before tax would be in line with its expectations, it didn’t actually provide any details about these expectations.
A third issue was that the company said it expects global supply chain pressures to continue.
How I’d play ASC shares now
In my view, the 18% share price fall yesterday was excessive. I think it’s created a great buying opportunity here. While ASOS might be set to experience some challenges in the short-term due to Covid and/or the reopening of the economy, the long-term growth story here remains intact.
Over the next decade, the online fashion market is set to grow significantly, powered by increased smartphone access globally, new payment technologies, advances in augmented reality (companies offering virtual changing rooms), and rising levels of wealth in developing economies. According to Statista, the global fashion e-commerce market is set to grow to $1.2trn by 2025, up from $725bn in 2020.
I expect ASOS to benefit from this industry growth because it’s a leader in its industry. Not only does it offer a world-class product range, but it also offers a top-notch experience for users including fast delivery and easy returns. Overall, it’s way ahead of most retailers.
It’s worth noting that in yesterday’s trading update, ASOS said the long-term opportunity is “greater than ever.” It also said it’s excited about the size of the prize ahead. This reinforces my view that the long-term story here is attractive.
Of course, the stock isn’t without risk. ASOS operates in a highly competitive industry. And many brands are now selling direct to consumer. This could impact future growth.
However, after yesterday’s share price fall I think the risk/reward proposition here is attractive. With the stock now trading on a forward-looking P/E ratio of less than 30, I see it as a ‘buy’.
