The value of scarcity

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I read in the FT today about broker downgrades of ASOS over the last few days. 20 out of 21 brokers have a buy rating on the stock, which has a 140x TTM PE multiple.

Valuation especially in the technology sector is not about what is happening today, but what happens tomorrow, when technology adoption curves mean that not just the early adopters are using a new technology.

This is very hard for financial analysts to cope with, as it takes a leap of faith to pay these premiums.

The real reason that ASOS is valued so highly in the UK is scarcity. There are few pure play e-commerce businesses on any markets, but especially in the UK.

This means if you want exposure to e-commerce you need to invest not based on pure financial fundamentals but look through these to the market shift.

Most investors really struggle with this. ASOS has never been ‘cheap’ so an opportunity to get into an e-commerce company like ASOS is very difficult. If you wait for a buying opportunity based on financial ratios you will never get in!

I have seen this again and again within the technology space, this doesn’t of course mean that everything in this space should command these hefty valuations, but still scarcity will push valuations up.

On a macro basis do you believe the following:

  1. e-commerce is going to grow internationally.
  2. The lower cost of servicing customers utilised by e-commerce companies makes it hard to compete with.
  3. Trusted brands within the e-commerce space get the largest slug of demand.
  4. Brand owners can’t ignore e-commerce forever!

If you do — then you should look at every e-commerce business that has scale within the sectors you are comfortable investing in.

Disclaimer: I have been an investor in ASOS for quite a while and I plan to keep holding!!!

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