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ASOS (LSE: ASC) shares have been on a wild ride over the last two decades. Over this period, there have been times when they’ve surged and times where they’ve tanked.
Currently, the shares are back near £4 (2009 levels), which is pretty incredible considering that they were trading above £55 a little over two years ago. Is this a phenomenal investment opportunity? Let’s discuss.
A focus on profits
ASOS has really struggled with its execution lately. For the six-month period to the end of February, for example, the group posted an operating loss of £272.5m
However, looking at the company today, there are reasons to be optimistic in relation to its share price, in my view.
For starters, the company is now focusing heavily on profitability, which is what investors want to see in the current environment.
And it’s having success on this front. In a trading update posted last week, the group advised that for the three-month period to 31 May, it returned to profitability with adjusted earnings before interest and tax (EBIT) for the period up more than £20m year on year.
It also said that it’s on track to deliver adjusted EBIT of £40m-£60m for the six-month period ending 31 August.
It’s worth noting that analysts currently expect earnings per share of 19.1p for the year ending 31 August 2024. That puts the stock on a P/E ratio of just 17, which isn’t high for a growth stock.
As well as focusing on profits, the company is also focusing on generating cash flow, which is another thing investors want to see right now. Looking ahead, management said that it expects to see “material” cash generation next financial year. This will help it reduce its debt.
Meanwhile, issues that have plagued the company in recent years, including inventory and supply chain challenges, appear to be moderating. For example, at 31 May, inventory was down 15% on 31 August 2022.
So, the company appears to be on the right track in terms of turning its performance around. If it can continue in this direction, its share price could move higher.
Takeover talk
Looking beyond business performance, there are a couple of other reasons to be bullish here.
One is that Sports Direct owner Frasers Group is building a position in the stock. Recently, it upped its stake to 10.6%. This indicates that it could be looking to buy the company.
Another is that there has been some takeover interest from international companies. Recently, it came to light that a Turkish online retailer approached ASOS about a takeover in December.
If ASOS was to receive a bid from another company, I’d expect its share price to jump.
High short interest
Having said all that, there’s no guarantee that the shares will rise from here.
One major problem is that growth has stalled. For the three-month period to 31 May, total group revenues were down 14% year on year. Intense competition from Chinese rival Shein won’t be helping here.
It’s worth pointing out that short interest remains high. This indicates that a lot of hedge funds are betting against the stock at present.
My view
Weighing everything up, I do think the shares look interesting at current levels.
They’re definitely speculative in nature. However, there’s certainly potential for the price to rise from here.
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