Questor share tip: Asos is currently in fashion but will its allure last?

Asos

£12.35 -25p

Questor says Hold

Yesterday the company said that sales rose by 50pc over the six months to September 30. This was on top of sales growth of 35pc over its full year to March. The company's share price has also shot up recently. It was hovering around 630p a year ago. Last night it closed at £12.35.

Asos has certainly come a long way since it launched as As Seen On Screen in 2000, selling versions of clothes that stars wore on telly.

But are shares in Asos – which now sells own-label clothes as well as brands such as Diesel, Mango and All Saints – worth buying?

We rate them as a hold.

The City is split on Asos's potential. Many analysts think that its shares have risen too much and the company's valuation is too high. It has annual sales of £223m last year and its market capitalisation is a punchy £924m.

Investec Securities has a sell recommendation on Asos and believes that its valuation is "unsustainable". KBC Peel Hunt also has a sell recommendation and believes that the shares have run too far: "We still see scope for outperformance over the third quarter, but expect market forecasts to remain broadly unchanged [after yesterday's results]. While Asos offers significant global growth potential, the shares have run too far in our view."

Last week Altium Securities downgraded Asos from a "buy" to a "hold". Analyst Philip Dorgan said that the broker downgraded the stock "purely because its shares had run ahead of our price target".

"We can see the shares going higher in the next six months but we would like to see a little more delivery – and ASOS is still only a small step along the path towards its £1bn sales target," said Mr Dorgan.

And this is the rub. The other half of the City see the potential for Asos to grow even bigger. In recent weeks it has launched in the US, France and Germany. The UK accounts for only 3pc of global internet traffic. Asos's management want to grab as much of the remaining 97pc as possible. The company has given itself just over four years to hit its £1bn sales target.

Of the bulls, Panmure Gordon says: "Management cautiously expect full-year 2011 results to be in line with expectations but we think that the company can do better than that, even taking into account dual running costs for the new warehouse of £2m-3m."

Citi is also positive: "With the scale of the opportunity, management's aggressive £1bn sales target and a sector-leading [earnings per share] growth outlook, we argue Asos should retain a premium multiple beyond 2012, driving our 'buy' rating."

So what do we think? Questor would follow Mr Dorgan's advice and hold on to the shares for the next six months but then consider taking profits.

We wonder how long Asos's stunning sales growth can continue. And we note in last year's annual report that operating costs increased by 26pc over its last full year. While costs fell as a percentage of sales fell, that is a big increase in overheads for any business, however stunning sales are. Hold.