Online fashion is a highly lucrative market. Indeed, it seems to be gaining in popularity all the time, with teenagers and twentysomethings using their tablets and mobiles more frequently to buy clothing items, with free and no-hassle returns making the shopping experience an even better one.
Two companies that offer such a service are Boohoo.Com (LSE: BOO) and ASOS (LSE: ASC). Which, then, is the better buy?
Vast Disappointment
Investors in ASOS and Boohoo.Com have endured hugely disappointing years. Since it listed in March of this year, Boohoo.Com has seen its share price fall by 47%, which sounds awful until you find out that ASOSs share price has dropped by 65% over the same time period. Part of the reason for their share price falls have been overly inflated expectations when it comes to their growth forecasts.
Clearly, all companies would love to maintain superb levels of growth, but it just doesnt happen. There are disappointments, for example ASOSs bigger-than-expected losses in China, and unforeseen challenges that are simply not initially factored into the share price. So, while price to earnings (P/E) ratios are likely to always be at a premium to the wider index (and can remain so for a prolonged period as was the case with ASOS), when there is disappointment, shares are hit even harder as has been the case with Boohoo.Com and ASOS this year.
Looking Ahead
Still, Boohoo.Com and ASOS are expected to post strong numbers moving forward. As mentioned, ASOS has had a tough year, with earnings per share (EPS) forecast to fall by 18% this year, before rising by 43% next year. Meanwhile, Boohoo.Coms 2014 is set to be much better than that of ASOS in terms of profit growth, with the Manchester-based company expected to grow earnings by 20% this year and by 36% next year. All of which are hugely impressive numbers if the two companies can hit them, of course.
After the recent share price falls, ASOS and Boohoo.Com now seem to offer reasonable value for money. Certainly, if their growth forecasts are met, they seem to offer growth at a reasonable price. For instance, ASOS trades on a price to earnings growth (PEG) ratio of 0.9, while Boohoo.Coms is just 0.7. For this reason, Boohoo.Com could prove to be the better investment of the two, although PEGs of less than one indicate that both companies could prove to be sound investments at current prices.
Diversification
Of course, a prudent move could be to complement ASOS or Boohoo.Com with larger, more established peers such as Next (LSE: NXT) and M&S (LSE: MKS). The former offers investors considerable growth potential, with earnings set to increase by 15% this year and by 8% next year, while M&S is due to grow its bottom line by 10% next year. Furthermore, Nexts share buyback programme remains highly lucrative for investors (and ensures the company only buys shares back when they represent good value for money), while M&S continues to yield an above-average 4.1%. As such, both Next and M&S could prove to be winning future investments, too.
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Peter Stephens owns shares of Marks & Spencer Group. The Motley Fool UK owns shares of ASOS. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
