It’s been a rough couple of months for the ASOS (LSE:ASC) share price. Since the start of July this year, the stock has tumbled by just over 45%. And just last week, shareholders saw their investments fall by another 13% following the release of the company’s full-year results. So, what’s behind this lacklustre performance? And is this decline actually a buying opportunity for my portfolio?
A seemingly promising earnings report
Despite the direction of the ASOS share price last week, the released earnings report actually looked fairly promising. At least, I think so. Revenue for the online fashion retailer grew by 20%, reaching £3.91bn. That’s a new record high for the business. And this strong sales performance led to pre-tax profits coming in 25% higher at £177.1m versus £142.1m a year ago.
The pandemic continues to have an impact on the shopping routine of individuals. And ASOS appears to have successfully capitalised on the current retail environment. This is especially true in the UK, which is the group’s highest growing market. Clothing lines still dominate the revenue stream. However, according to the latest report, its Face & Body product lines are seeing rapid adoption by customers growing by 49% over the last 12 months.
Needless to say, this is all quite positive news. So why did the ASOS share price drop so steeply on this report?
The fall of the ASOS share price
A lot of the lacklustre performance seen throughout most of 2021 seems to stem from rising investor uncertainty surrounding the company’s ability to maintain growth in a post-pandemic environment. After all, now that stores have reopened, the high street is regaining its popularity among shoppers.
As it turns out, investors were right to be nervous. But for a different reason. Sales performance over the last 12 months has been strong. But gross margins have begun to suffer as a result of both supply chain disruptions and delayed effects of Brexit.
To make matters worse, it doesn’t look like these problems are going away any time soon. Why? Because management’s pre-tax profit guidance for 2022 currently lies between £110m to £140m. Even if the business manages to achieve the higher end of this forecast range, that still represents a 21% decline from this past year. With that in mind, seeing the ASOS share price tumble is not too surprising.
The bottom line
Watching a growth stock fall drastically on slowing growth is not uncommon as these businesses tend to carry lofty valuations. And this risk is actually something I highlighted back in April this year.
Today the current ASOS share price places its market capitalisation at around £2.4bn. Comparing this to the high-end forecast profit figures puts the price-to-pre-tax-profits ratio at 17. To me, that looks like a far more reasonable valuation compared to the ratio of around 45 earlier this year. And since the supply chain issues will eventually be worked out over the long term, I personally see the recent decline in the ASOS share price as a buying opportunity for my portfolio.
Zaven Boyrazian has no position in any of the shares mentioned. The Motley Fool UK has recommended ASOS. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
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