Should I buy this growth stock at £10?

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Online fashion retailer ASOS (LSE:ASC) is currently trading at 966p (just under £10), and is down a staggering 75% in the last year. It’s settled at around this level for around the last month, and I think it has the potential to be my portfolio’s top growth stock beyond 2022 if I buy now, but there is plenty more to consider first.

Share price volatility

The clothing seller’s share price has been historically volatile over the past five years, reaching highs of over £76 per share in 2018, but then falling to trade at under £11 per share in 2020, as with many FTSE stocks it plunged during the first few months of the pandemic.

But over the same five-year period, income has grown by £2bn! And it’s still increasing: revenue for the first nine months of the year is up 2% when compared to the prior year.

So why the peaks and troughs in the stock price?

Well, profits have been harder to come by. Most recently, the 2021 annual figures showed a profit before tax of £177m, and a net margin of 3%. The latest expectation for pre-tax profits in 2022 is at £20-£60m, having been revised from previous guidance of £110-140m. With costs across all industries spiralling, I think it’s fair to say it can expect a squeeze on profit margins too.

When it comes to dividends, ASOS’s policy is to reinvest profits into the business, and not distribute dividends, which is a strategy it doesn’t look set on changing any time soon.

Not such a good (out)look

There are plenty of external factors that could have an impact on the short- and medium-term performance of ASOS, not least the cost-of-living squeeze in the UK (its biggest market), but two recent issues really stand out.

The decision to “suspend sales” in Russia as a result of the war in Ukraine, of course, follows the trend of many blue-chip companies pulling their business out of the country this year. But historically ASOS has done approximately 4% of its business in Russia, and the decision cost the business a reported £14m. A scare for shareholders, but perhaps not customers.

However, the clothing giant could also be about to rile up its core customer base too! The Competition and Markets Authority is said to be looking into ASOS’s ‘Responsible edit’ range following reports that some clothes do not meet its green criteria. With its target demographic being young adults, if the investigation goes the wrong way, ASOS could lose much of its environmentally conscious customer base overnight.

The naked truth

There are clear risks with being an ASOS shareholder right now, and I’m expecting the share price to continue its volatility in the short term. But ASOS still occupies a strong market position in the online fashion market and I think it has clear growth potential over the long term. On balance, I’m still keen to add to my position on ASOS whilst it’s trading at its current price.

The post Should I buy this growth stock at £10? appeared first on The Motley Fool UK.

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James Yianni has positions in ASOS. 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.