Since a trough of 17.8 in mid-October,ASOS(LSE: ASC) stock has rallied by 85% to 33 but the question is why?
Nick Robertson, CEO and founder, recently got rid of a large 10% stake this was bad news, as trailing trends for the stock show.At the same time, several brokers have questioned the feasibility of the retailers expansion plans abroad.
Whats next then?
Everybody wants to know whether ASOS is massively overvalued. I reckonASOS is a very risky investment indeed,but at 33 a share it could turn out to be a decent candidate for a diversified portfolio,even assuming a couple of profit warnings off the back of unsafe margins are on their way in 2015.
After all, its current and forward valuations signal that its not incredibly important for ASOS to grow as a profitable entity: its just important that it growsa lotevery quarter, just as it has done in recent years.
To back up my statement, I found evidence in the marketplace: ASOS shareholders are in good company, although the shares of other similar businesses have been holding up much better than those of ASOS in the last couple of years.
Vipshop Holdings & Mercadolibre
Ive spent several hours doing research to determine whether the stock of any other comparable business looks similarly overpriced, and I found these two companies: Vipshop and Mercadolibre.
Never heard of them before? Well, me neither, but if you are invested in ASOS or you are interested in possibly buying shares,you ought to know a few things about these two businesses and their relative valuations.
Vipshop is engaged in online product sales and distribution. A Chinese company listed in the US, its core financials are striking similar to those of ASOS; no debts combine with low operating profitability, which isoffset by higher revenue growth than that of ASOS.VipShops net profitability, as gauged by net income, is forecast to be roughly in line with that of ASOSs at about 3.9% in 2015.
At 40x adjusted operating cash flow and more than 60x earnings, Vipshop trades in line with ASOS, althoughVipshop is much bigger than ASOS both by sales and market cap. Its financials, one may argue, are only slightly better than those of the UK fashion retailer, but thats fully reflected inVipshops one- and two-year trailing performances +133% and +1,032%, respectively which compare with -50% and +20% for ASOS.
Mercadolibre: Profit Vs Growth
Elsewhere, Mercadolibre is an e-commerce platform, with core operations inBrazil, Argentina, Mexico and Venezuela. To cut a long story short, Mercadolibre is not growing as fast as VipShop (its growth rate is more similar to that of ASOS), but its much more profitable, with a net margin at 14%. Just like ASOS, its balance sheet is debt-free, and its shares are similarly expensive, at 70x forward earnings, and 30x forward adjusted operating cash flow.It has had its fair share of problems in the last 18 months, and the shares have been volatile, but have gained 43% of value in the last 12 months and 53% in the last two years.
Moreover, Mercadolibre pays dividends, which begs an obvious question: should ASOS take heed andrelease value?
Very simply, ASOS shareholders are not crazy to stay put right at 33 a share, but for their holdings to double to last years level, either grow must speed up above consensus estimates revenues are forecast at 1.15bn and 1.4bn in 2015 and 2016, respectively or ASOS should find a way to push up its operating profitability, maybe by implementing tougher rules on refunds.
Either way, there are alternatives to ASOS: in fact, ASOS is just one of severalhigh-growth companiesincluded ina brand new report whereseveral value opportunitiescarrying a relatively high risk profile have been identified. In short, this report could help you record a 50% pre-tax return or more this year and next!Ready to learn more?
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