Since listing on AIM in March 2014, Boohoo (LSE: BOO) has delivered a rather subdued performance, with shares in the fashion retailer being down 4% at the time of writing. And this period has coincided with the disastrous share price performance of sector peer, ASOS (LSE: ASC) (NASDAQOTH: ASOMF.US), whose share price has fallen by 55% since the start of March 2014, which has almost certainly had a knock-on effect on Boohoo.
Of course, ASOS has delivered a quite staggering share price performance prior to the last few months. For instance, over the last five years it has risen by over 700% (including the recent fall) and the company has been able to dominate the online fashion market for teens to twenty somethings.
However, a recent profit warning has had a huge impact on the share price, at least partly because of the extremely high valuation placed on the company by investors. With this in mind, could Boohoo now be the stock to watch in the online fashion space?
ASOS Junior?
In many ways the similarities between Boohoo and ASOS are striking. They are both online fashion retailers that target the same age group, they have similar price points and have been UK-focused (although ASOS far less so in recent years). They both come with extremely high valuations and even higher growth rates. They also have vast potential in the eyes of many investors, which means that while many stock market participants may balk at the idea of any company being worth over 50 times its earnings, valuations have the potential to go even higher.
Advantage Boohoo?
The key difference between the two companies, though, is their stage of development. As mentioned, ASOS is now seeking growth abroad and this has been a key reason for its recent profit warning and subsequent share price demise. A stronger pound has worked against it and has meant that profits from outside the UK are significantly lower than forecast.
While it also operates outside of the UK, Boohoo has been hit less hard by currency headwinds and has still been able to deliver in-line numbers. Part of the reason for this could be that it has not yet hit ‘terminal velocity’ within the UK and, as such, still has some room to grow. In other words, ASOS’s growth rate in the UK will naturally level out over time and, when combined with a stronger pound, this means that expectations are less likely to be met. Boohoo, meanwhile, still has more growth potential in the UK, which could prove to be a key differentiator between the two companies in future.
Looking Ahead
Clearly, a high valuation means that shares can be hit harder than better value peers. Indeed, both companies are extremely sensitive to positive and negative surprises in their growth rates, and the recent share price performance of ASOS is evidence of this. While Boohoo’s share price could yet have further to go as a result of its stage of development versus that of ASOS, overly inflated expectations could yet prove to be its downfall over the medium to long term. While it may have an advantage over ASOS at present, it could yet suffer the same fate and become the victim of unrealistic growth rates that are unlikely to last indefinitely.