Asos, Alas

Michael Wilson isn't surprised that the market is getting its knickers in a twist

It isn’t every day that a listed company loses 42% of its valuation in a few minutes, but that’s what happened today to Asos, the online clothing chain that specialises in making you feel like feel like a celebrity on a tightish budget. (The name, apparently, is an acronym for ‘As Seen On Screen’.)

Yes, overnight the AIM-listed company saw more than a billion pounds knocked off its market capitalisation, leaving it valued at barely £2.6 billion.  The shares opened this morning at £26.26 – 42% down on Wednesday’s close of £45.33. And although it later recovered to £32.17, that was still an awfully long way short of February’s £71.95 peak.

Rollercoaster Valuations

Well, say the Victor Meldrews of this world, that’s what you get, of course, from mixing it with the AIM market. Easy come, easy go. Today you’re Nicole Kidman, and tomorrow you’re that woman who used to be on daytime TV. No wonder we don’t encourage widows and orphans to go near these AIM things. Have you thought of taking up roulette instead?

It gets worse. Even at today’s prices, Asos is still on a trailing price/earnings ratio of 70 or so. (Yesterday it was 101.) That’s better than some tech stocks, I’ll grant you, because a fair few of those don’t have any earnings in the first place – but a profit of 44 pence a share doesn’t exactly count as generous against a share price of thirty two quid.

What’s also sobering, and perhaps more revealing, is that today’s share price collapse comes on top of a trading quarter that saw UK sales actually growing by 43% year-on-year in the three months (to the end of May 2014). And a 17% increase in international sales, which the company said accounted for 62% of total sales – compared with 67% in the corresponding period of last year. (Well, it would, wouldn’t it, if UK sales were growing that fast?)

Strong Nerves Required

We could speculate for ever about whether this morning’s recovery to £32-ish is a dead cat bounce or a genuine opportunity to buy into a fantastic growth stock at a bargain price. It all depends on whether you believe tomorrow’s consumers are still gasping for fashion, and whether they still have the money to spare?

But in a week when new reviews of the US market have shown a steady deterioration in the spending power of the squeezed middle classes, it’s very clear that Asos’s share price has been highly leveraged to an extent that we haven’t seen since the late nineties. And that today’s price crash has been brought on by a bumpy return to reality. A reality, what’s more, that most of us would give our eye teeth to have for ourselves. A 43% sales growth in one year isn’t to be sneezed at.

Look In The Mirror

The answer, then is to take a good long look at ourselves before we criticise the company. If a p/e of 101 was the state of our expectations, we almost deserved to be disappointed.



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