Is the ASOS share price set for explosive growth?

Many UK stocks are off to a good start in 2023. ASOS (LSE: ASC) share price, up 83% since the start of the year.

To put that in perspective, we’re still looking at a 56% decline over the past 12 months. And ASOS shares have lost 87% of their value in five years. That’s some comedown for high-growth stocks whose price-to-earnings ratio (P/E) previously peaked at more than 100.

Still, ASOS has had some serious booms and busts in its time. And previous slumps have usually turned round into a soaring bull run. I think it’s all about value. And if the stock is cheap now, I wonder if it could explode in 2023.

ASOS posted negative earnings for the year ending August 2022, and forecasts also show a loss for the current year. That makes the P/E worthless now, but the City expects profits to return in 2024. The P/E value will be below 20 if the analysts are right, which I think looks reasonable for continued growth potential.

Cash flow

For the four months to December 31, total revenue fell 6%. Also as a general economic pain, the company suspended trade with Russia in March 2022. Excluding Russia, like-for-like sales decreased by only 3% from the previous year, which is a bit better.

It seems the outlook for the second half of 2023 will be key for ASOS. The board still expects first-half cash flow to be slightly negative. But he said “continue to expect significant profit and cash generation in H2 FY23 and beyond, following losses in H1 FY23“.

Turnaround

For many investors, myself included, this is a key turning point in any recovery. It’s all very good to see turnover, and even paper profits, but if the company has debt and suffers from cash outflow, it just has to turn the direction of cash flow around.

The balance sheet has some debt. At the end of August in 2022, net debt stood at £153m. But considering the turnover rate, and what I see as long-term profit potential, I don’t think that’s too bad. The previous year ended with £200m of net cash, so it’s been a bit of a short-term thing, so far.

Short sale

It is unwise to read too much into short-term stock price movements at the best of times. And some of the new strength will most likely come down to heavy short selling positions that some bearish investors have built up.

When a stock like ASOS starts to rise, some short sellers will be forced to buy to complete their positions. This is known as a short squeeze, and it can accelerate the spike in stock prices.

I will be watching for a short position in ASOS as we move into 2023, and I expect short-term volatility. But for the long term, I think growth stock investors can make a comeback.