ASOS - A Scale Economies Shared Play

Asos, founded in 2000, is a British online retailer providing products for "fashion-loving 20-somethings", currently having an active customer base of 26.4M customers. Through their market-leading app, customers can choose between 90.000+ products sourced from more than 850 of the best global and local third-party brands, complimented by their mix of fashion-led in-house labels including ASOS DESIGN, ASOS EDITION, ASOS 4505 and Topman to name a few. 

During the fiscal year 2021 Asos generated revenues of £3.91B and a adjusted profit before tax of £193.6M, an increase of 22% and 36% respectively. As stated by COO and CFO Mat Dunn, Asos has set a medium-term target of £7B in annual revenues and an EBIT-margin of at least 4% within 3-4 years, translating to top-line growth of between 16-21% annually. Even though Asos' underlying business has steadily improved, its stock price has done the opposite - declining 73% the last year. This sharp decline was what drew me to the company in the first place, but digging deeper into its business model and the company's values, it's clear that Asos has a strong brand and loyal customer base. 

Renowned investor Nick Sleep, who correctly identified both Amazon and Costco as great investments despite their low margins, has also been investing in Asos for some time now. These companies all possess one distinct competitive advantage, known as scale economies shared. This simply means that the cost benefits large corporations receive because of their sheer size and operations are passed onto their customers through reduced product prices and improved customer experience, instead of the company keeping those benefits for themselves. This mentality is the exact opposite of Wall Street's short-term thinking and replaces the emphasis on short-term financial results with creating lasting, loyal and valuable customer relationships. With management estimating that Asos' total addressable market will be in the region of £430B by 2030, laying emphasis on providing an excellent customer experience, solidifying itself as a low-cost provider and developing robust and lasting relationships with its customers, is what positions Asos to efficiently capitalize on this opportunity and increase its market share. 

One of the most important factors to evaluate when considering an investment is a company's management. Unfortunately, Asos' former CEO Nick Beighton stepped down from his role as CEO in the late stage of 2021, after being Chief Executive Officer of the company for six years. After his departure was announced, CFO Mat Dunn was also given the role as Chief Operating Officer. Based on his statement from the annual report, Dunn seems to be well aligned with shareholders, laying emphasis on creating long-term shareholder value and keeping the scale economies shared within Asos intact. To quantify management's performance, return on invested capital and return on equity are two important metrics to look at. With a 10-year average ROIC of 18.2% and ROE of 19.34%, it's safe to say that management has allocated capital in an efficient matter - creating more shareholder value by retaining earnings, rather than paying it out to shareholders through dividends. 

Asos possesses a superior business model, which will contribute to the sustainability of its impressive growth rates for years to come, but short-term uncertainty because of supply-chain constraints, growing inflation, and lower guiding for H1 FY2022 has seen its stock price plummet. Based on 2021 financial results, Asos is currently trading at an EV/EBIT multiple of 7,79 and a P/E multiple of 11,33 - a historical low. When projecting top-line growth of 10% from year 1-5 and 8% from year 6-10, with an EBIT-margin and Free Cash flow-margin of 4%, terminal multiple of 15 and a discount rate of 15%, Asos has 78% upside from current levels. 

The valuation model projects revenues for the next 10 years, with operating income and free cash flow as a percentage of revenue (4%). The terminal multiples for EBIT and FCF are both 15, and when discounting these numbers back to PV with a discount rate of 15% and averaging these out, I reach a fair value per share of £25,8 - with the stock trading at £14,65 per share at the time of this writing.