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 thats a 73% loss in less than seven months!
Ive 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 its 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 were on for a fall in earnings per share (EPS) this year of around 19%, followed by a flat 2015. If youre looking for a textbook example of the kind of thing that bursts a growth bubble, youve 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 ASOSs 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 its 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, lets 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 Februarys 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 wont see 70 per share being justified until 2026!
And how long at 10% per year before wed see a 70 share price on the same criteria? Wait for it not until 2036!
And dont forget, at the end of it all, the shares would still be priced on a growth-rated P/E of 25.
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Alan Oscroft has no position in any shares mentioned. The Motley Fool UK owns shares in 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.
