Shares in online fashion darling ASOS (LSE: ASC) soared as high as £71.95 at the end of February, but a series of profit warnings has seen the price crash all the way down to £19.56 today — that’s a 73% loss in less than seven months!
I’ve opined previously that the slump was inevitable — but the question now is whether ASOS shares can regain the heady heights of early 2014.
I reckon it’s a big No — at least not any time soon.
Growth paused
ASOS has been valued as a big growth stock, but has had to seriously downgrade its expectations for the current year. It now looks like we’re on for a fall in earnings per share (EPS) this year of around 19%, followed by a flat 2015. If you’re looking for a textbook example of the kind of thing that bursts a growth bubble, you’ve got it right there.
Even after the share price crunch, ASOS shares are still on a forward P/E of 49!
Will ASOS get back to growth after a period of price-wars and technology investment? It surely will. But the 30% to 40% per year and more that the company has been enjoying is surely at an end.
What would it take to get ASOS’s forward P/E of 49 down to something more realistic?
Seven years?
While it remains a growth share, ASOS should be on a higher P/E than the market average of around 14 — and even if it’s worth a P/E of around, say, 30 or so over the next couple of years, that must come down as markets become more mature and growth slows. So in the medium term, let’s put a rational P/E on ASOS of 25, purely for the sake of my “What if?” guesswork.
Should ASOS manage annual growth of 20% starting in 2016, which I think would be optimistic over the long term, it would take until 2019 to get its P/E down under 25 — and a five-year-out P/E of 25 sounds a bit stretching to me.
And if ASOS only managed to average 10% EPS growth per year, the P/E would not drop below 25 until 2022 — with no share price growth for seven years!
Back to £72?
But this is all based on the current share price, so what would be needed to get it back up to February’s peak of £71.95? Well, even if ASOS can manage a steady 20% growth per year over the longer term, on the same P/E basis we won’t see £70 per share being justified until 2026!
And how long at 10% per year before we’d see a £70 share price on the same criteria? Wait for it… not until 2036!
And don’t forget, at the end of it all, the shares would still be priced on a growth-rated P/E of 25.