ASOS worth 40% more

After two years of heavy investment in its technology and warehouse systems, ASOS looks ready for a return to double-digit earnings growth. Trading looks solid ahead of the crucial Christmas period and a recent fashion preview sent pulses racing.

The online fashion retailer is clearly in vogue among 20-somethings, and broker Barclays has decided to turf out top pick Dixons Carphone in favour of the AIM-listed star.

Barclays reckons 2016 sales growth guidance of 20% is conservative following infrastructure investment, and believes a three-year earnings per share (EPS) compound annual growth rate (CAGR) of 33% is achievable.

There is still work to be done, of course, but efficiency savings already made should offset any pressure. As marketing steps up, customer acquisition growth should, too, driving sales higher.

While sales should grow by another 23% in 2017 (22% in 2016), pre-tax profit and EPS is expected to surge by 42% and 45% to £84 million and 80p respectively (up 23% and 25% in 2016).

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"What is particularly appealing at this stage is visibility that, in our view, is better than in the recent years: we see a clearly laid out strategy of calculated investment and growth for the years to come," says Barclays.

Finger on the pulse

As an online fashion retailer, ASOS looks like its finger is on the fashion pulse after its recent spring/summer 2016 fashion preview - the first in a few years.

With a wider shoe range set to deliver products at some underserved price points and a Disney collaboration waiting in the wings, ASOS looks like it’s got this season covered. Launching into the Russian and Chinese markets is an additional growth driver.

Floating on the Alternative Investment Market (AIM) in 2001 at 20p, ASOS has risen by an astronomical 16,000% to 3,225p in the 14 years since. If you had put £1,000 in the online retailer at its IPO, you would have around £161,000 today. And it could be more; Barclays reckons the shares are worth 4,500p.  

Of course, further warehouse disruption and badly executed pricing remains a risk. With over half of consumers aged 18-29 prioritising price, ASOS has to get this right. Barclays thinks 2,000p could be the share price floor if it doesn't. Include the benefit of sales leverage, however, and ASOS could be worth 5,500p, claims the broker.  

"ASOS offers significant growth potential due to increasing brand awareness, best-in-class delivery and an increasing number of social media fans.

"We see ASOS as best placed to benefit from the increased online penetration of apparel retailing around the world," add the analysts, retaining their 'overweight' recommendation.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.