When I last covered ASOS (LSE: ASC) shares on 19 July, I said that the risk/reward proposition was attractive. At the time, the online fashion retailer’s share price had just crashed to under 2,200p on the back of a profit warning.
To my mind, however, the group’s problems looked short-term in nature, and I noticed that both the CEO and the chair were buying shares, which is generally a bullish signal. A few days after that article, I picked up some ASOS shares for my own portfolio at a price of 2,170p.
Fast forward to today, and ASOS’s share price has jumped to nearly 3,500p after final results last week revealed no nasty surprises. That means that I’m up around 60% on the shares I bought in late July which is a great return in less than three months. What’s the best move now though? Should I take my profits, hold onto my ASOS shares, or buy more?
Long-term growth story
The reason I purchased ASOS shares in the first place was that I like the long-term growth story. In my view, the potential for international growth is significant. In particular, I see a huge opportunity in the US (only 13% of sales last year), where, according to my research, there is no online retailer that offers the wide range of clothes and brilliant shopping experience that ASOS does.
Last week’s results confirmed to me that the growth story is still intact. While profits were down sharply following warehouse and technology investments, sales continued to grow. In the UK, sales for the 12-month period rose 15%, while internationally, sales increased 11%.
Group wide, total orders jumped 14% year on year. I’m pretty happy with this top-line growth as it suggests that ASOS is growing at a healthy rate, even if sales growth isn’t as prolific as it was a few years ago.
I was also happy to hear that management is confident in relation to the group’s future prospects, with CEO Nick Beighton commenting: “We are well positioned to take advantage of the global growth opportunity ahead of us.” Given the sales growth and management’s tone, I’m still bullish on the long-term growth story.
Yet what about the valuation? Is the risk/reward proposition offered by ASOS shares still attractive after a 60% share price gain in less than three months?
For the year ending 31 August 2020, analysts expect the group to deliver earnings per share of 56.4p, rising to 82.5p the year after. At the current share price, that puts the stock on a forward price-to-earnings ratio of 60, falling to 41 using the following year’s earnings forecast.
Those valuations do concern me a little bit as they are certainly high. After the recent share price rise, there’s much less of a margin of safety. That said, just this morning RBC raised its price target for ASOS from 3,300p to 3,900p, which suggests the broker believes the shares can keep rising.
All things considered, I’m going to hold on to my ASOS shares for now. They are expensive, which means there’s risk to the downside, but I continue to like the long-term story so I’m going to let my winner run.
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Edward Sheldon owns shares in ASOS. 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.
Motley Fool UK 2019