ASOS(LSE: ASC) andBlinkx(LSE: BLNX) used to be two market darlings, which seemed unstoppable as growth exploded and their shares surged higher. However,after several profit warnings and an almost continual stream of bad press, the companies are now some of the markets most controversial stocks.
And after declining 68% and 82% respectively year to date, the question is, how much lower can ASOSand Blinkx go?
One of ASOSs biggest problems is the fact that the company is losing market share to other online rivals. As a result, the company is having to discount its clothing heavily to compete and continue to hit sales targets.
Its easy to see how this is having an effect on ASOS. In the year to 31 August ASOSs gross margin declined by230 basis points, compared to the year ago period. During the third quarter alone,ASOSs gross margin contracted by 640bps, compared to the year ago period.
Whats more, it has emerged over the past few weeks that some of ASOSs suppliers have become frustrated with the companys discounting. Some suppliers have threatened to pull their products from the retailers website, after claiming that ASOSs discounting was pushing their brands down market.
As ASOS struggles with competitors, Blinkx is still trying to shake off the damaging allegations made about its business model on an online blog. These allegations criticized the companys outsized success.
Unfortunately, even though the comments made within the blog remain allegations, and nothing more, Blinkxs reputation has suffered. This has had a knock on effect on the companys trading. For the first half of the financial year, Blinkxs trading came in significantly below expectations. Management blamed this slowdown onindustry-wide issues of efficiency and effectivenesscompounded by the lingering effects of the disparaging blog about the Company.
As ASOS and Blinkx struggle with factors outside of their control, its likely that the two groups could see their shares fall further as investors fret about uncertain futures.
Still, after Blinkxs recent declines the company now looks attractive on a valuation basis. Indeed, even though earnings per share are expected to fall 27% this year, the company trades at a forward P/E of only 12. Nevertheless, City analysts expect Blinkxs earnings to fall further the year after, which means that the company is trading at a 2016 P/E of 15.8.
ASOS, on the other hand, looks expensive at current levels.At present levels, and even after recent declines, ASOS trades at a forward P/E of around 49, which seems expensive for ASOSs faltering growth. Theres no doubt that ASOSs lofty valuation may put some investors off.
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The Motley Fool owns shares in ASOS.