Thinking of buying ASOS shares after the recent price crash? Read this first

This week has been an absolute disaster for ASOS(LSE: ASC) shares. On Monday morning, the online fashion retailer told investors that it had a seen a “significant deterioration” in trading conditions in November and that full-year sales are now only expected to rise 15%, compared to previous guidance of 20-25%. It also advised that operating margins are expected to halve this year, due to heavy discounting. Given how on edge investors are at the moment, and the stock’s sky-high valuation, this profit warning wasn’t received well at all. ASOS shares fell 40% on the news. And the selling has continued throughout the week, with the shares falling another 12% yesterday. Year to date, ASOS’s share price is now down a staggering 68%.

Thinking of buying the shares after the recent drop? Here are a few things you should know first.

Earnings forecasts have been smashed…

The first thing you need to be aware of with ASOS shares is that analysts have taken a sledgehammer to their earnings forecasts since Monday’s update.

This time last week, City analysts were expecting the online retailer to generate earnings per share of around 118p for the year ending 31 August 2019. However, after Monday’s news, that earnings forecast now stands at just 52.5p per share. In other words, analysts have reduced their estimates by 56%. That’s a colossal downgrade!

This is important to acknowledge because it obviously has implications for the stock’s P/E ratio. Are ASOS shares actually cheap after the recent fall? Well, using that earnings forecast of 52.5p, the current forward P/E ratio is still 43.5. That valuation looks quite pricey to my mind, given the company’s lack of momentum right now.

Price targets have been slashed…

Furthermore, analysts have been quick to slash their price targets for ASOS since Monday’s profit warning. So far this week, Barclays has cut its price target from 7,500p to 4,000p, Credit Suisse has reduced its from 6,000p to 3,500p, and Berenberg’s has been slashed from 8,300p to 4,000p. These are no doubt large downgrades, although it’s worth noting that all three price targets are still significantly above the current share price.

…Yet directors are buying

However, it’s not all bearish news. In an interesting development, both CEO Nicholas Beighton and chairman Adam Crozier took the opportunity to buy more shares in the company this week after the price drop, which could be viewed as a bullish signal. Both directors spent around £100,000 on ASOS shares on Tuesday, which indicates they’re confident about the future. And in an interview, Beighton struck an upbeat tone, saying: “This is just a bump on the road for ASOS. Our ambitions for the future haven’t changed. We know we’re capable of achieving.” So perhaps the outlook for ASOS isn’t as bad as some fear.

Overall thoughts

ASOS has always been a stock I’ve had my eye on, as the company offers a brilliant online shopping experience, in my view. These days, I literally buy 80% of my clothes from the online retailer and I know many people who have similar shopping habits.

That said, I’m a little wary of buying the shares while they’re still falling. I don’t want to try catching a ‘falling knife.’ As such, I’m going to leave ASOS on my watchlist for now, keeping a close eye on near-term developments.

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Edward Sheldon has no position in any shares mentioned. The Motley Fool UK owns shares of and 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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