Morgan Stanley analyst Fred Bjelland said that ASOS (LON:ASC) could be the ‘Facebook of fashion’ and told clients that the shares look cheap compared to other ‘online winners’.
The analyst did, however, emphasise that the group’s first mover advantage is waning due to increased competition and this is a risk. He believes that the stock has plenty of ‘optionality’ but it could also disappoint amid high expectations.
“Despite its young age and UK focus, it has grown to become the third most visited fashion website globally,” Bjelland said in a note to clients.
“Given its global and ‘connected’ customer base of 16-34 year olds and attractive customer proposition, ASOS has the potential to become a global fashion destination, the Facebook of fashion.”
The analyst rates ASOS as ‘equal weight’ and he has a £27.55 target price.
Bjelland added: “We believe some optionality is already ‘in the price’, and with domestic growth slowing from increased competition, it is unclear how sustainable ASOS’s competitive advantage will prove, especially on a global basis.”
Earlier this month the online fashion retailer said that group revenues in the year to the end of March soared 52 percent to £340 million as group sales jumped 58 percent to £324 million. Gross profit rose 41 percent to £131.6 million, however, pre-tax profits dropped 23 percent to £15 million due to relocation costs of £12.9 million.
However the update split opinions on the City. On the stock exchange investors ditched the stock, sending to shares 8 percent lower, in response to the news - which was also weighed down by broader negativity towards the UK’s retail sector.
Since then however the shares have rebounded strongly, gaining more than 23 percent from the recent low of £19.92. Today the shares are are changing hands around the £24.70 mark.
UBS analyst Isabel Green was less than impressed with the results, saying that just performing in line is not enough for the leading online retailer. The analyst claimed that ASOS unlikely to materially beat current forecasts, slashing its rating from neutral to sell.
However analysts at Citigroup actually upgraded their price target, from £23.00 to £26.00 a share, in response to the results. Citi argued that ASOS is actually set for several years of premium growth and should be capable of holding its premium valuation multiples over time given the immaturity of the global online clothing market.