Oh don’t be too greedy! If you invested at the beginning of the year you are still up 44% after today’s move or if you invested a year ago you are up 67% and 5y ago you have more than tripled your money. You are only losing money if you invested two weeks ago but if your time horizon with ASOS is two weeks and you have started panicking then you deserve it and I suggest trying the casino next time! So should you be taking profit (most of you) after today’s share price move or there is further upside?
Why is ASOS down 7% today as I write?
Investors have been piling up on ASOS shares for a while on good sales performance, even more positive momentum with customers, stabilisation in margins and more recently expectations of material FX tailwinds due to weak sterling. As it always happens with this stock shares overreact both up and down. For the stock to go higher, specifically today, you needed an upgrade in either the sales growth guidance for FY17 or the margin guidance or both. Instead you got served an unchanged growth guidance and a material increase in capex from £87m to £120-140, which will at best stay as high in FY18 if not higher assuming investment in a new US warehouse. Boom! The way to go Helen (Mrs Ashton is the CFO)! So no EPS upgrades today, higher capex spend, “expensive stock” on a PE multiple and very good performer recently so…makes sense?
Is this the end of the share price run?
Please take a deep breath and reread what I wrote before and think whether the reasons the stock got higher prior to today cease to exist. I really think they are still there and actually got stronger. Sales performance is good and can get better, ASOS engages with a lot more customers who spend increasingly more time and money with ASOS , through mobile primarily, where ASOS excels, margins are stable and within the management’s absolute control at the moment and FX tailwinds are there, more phased into the next 1-2 years rather than now but they are there. So no this is not the end of the run.
Can ASOS shares move higher after today?
Yes. For three reasons other than the fact that their customers continue to love their product.
- The sales growth guidance is conservative. I heard twice Mrs Ashton during the analysts presentation earlier today say that this is an initial guidance and will be revised as the year progresses. Of course it will. Higher. Why? Well look at the customer growth. Customer growth accelerated to 25% from 18% 6 months ago and c10% a year ago. Increased marketing spend, reduced prices and improved customer experience delivers. I would treat customer growth as a leading indicator and the starting point for total sales growth. On top I reckon we will be getting FX tailwinds, increased average basket size as price investments yield fruit. So that 20-25% can be more 25-30% I believe unless something radically negative happens that I don’t foresee.
- Increased capex is good when ROIC and growth are high. Be worried when a growing business doesn’t spend much, not the other way around. I know I know you worry they splash the cash! That £173m cash is tempting. You worry they make their HQ at Mornington Crescent a playground hence the return on investment will be zero on quite a few £m spent there over the next three years. I wonder what Google’s investors did say when they first discovered that Google’s offices were a playground and how happy they are with the share price since then! ASOS is its people and keeping them happy is a great investment if you ask me. Generally a retailer’s asset is their people as retailers are light on tangible assets so I have no issue with a great working environment. And look at the numbers anyway. Return on Invested Capital was 47% in FY16. Even if it just stays at the 30-40% region tell me this is not a great return or, put simply, money well spent. If suddenly they were buying a few Lear jets to travel around then yes I would have got worried but they don’t.
- Brexit affects ASOS the least vs. any other UK consumer discretionary name. Let’s not forget what will likely be the big cause of volatility over the next few months. Actually it benefits them as ASOS exports more than 60% of its product and is a natural net buyer of non-sterling currency. Doesn’t sound too bad! Let alone that their core customer wouldn’t care much about political developments so there shouldn’t be big mood swings affecting their shopping habits unless of course they lose their jobs (too big a debate to open it up now).
Keep calm and focus on what matters…
No I don’t give ASOS management a carte blanche and none of you should but it really doesn’t smell trouble to me, quite the opposite, other than the near term retreat that I find reasonable. Mr Beighton (CEO) appears to be on top of operations, Mrs Ashton confident with her numbers and I bet Q1 and Q2 sales growth will be comfortably ahead of the top end of guidance. They still have my vote of confidence because I think I can understand the reason shares are down today. Can they be down a bit more? Of course, they always overshoot either way. I wonder how US investors will react when they see Nick, Helen and Greg (CEO, CFO and IR) over the next few days in the US. Usually they understand growth stocks a lot better than European investors but they may be also tempted to let the stock pull back a bit before they go back in. I may wait until the team is back in London but I cannot see any reason the stock won’t cross comfortably above £50 again very soon but if you can time a small correction well you can make good money! But don’t be greedy. Oh yes I forgot the very high valuation, c65x PE. Ohh yikes too much right? If it doesn’t smell trouble it is irrelevant. You could have bought ASOS a lot cheaper than that 2y ago and lose money over a few months period or a lot more expensive than that 3+ years ago and made money. The PE has fluctuated between 30-100x
Author: Chris Chaviaras
Disclaimer: The author has no position on ASOS shares currently.