No BABA; re-iterating BUY rec on Asos and Yoox
ASC LN: GBP 19.81; YOOX IM: Eur 17.15
September 25, 2014
Zalando is going to be another high profile internet IPO. Zalando is an on-line fashion retailer. It competes directly with Yoox, Net-a-porter.com, and Asos, and of course a bunch of other net retailers, not to mention the websites of brand names themselves. The placing for the shares is about to finish, and there is no doubt that the offering will be oversubscribed and the IPO very successful. Trading should start October 1. While we were very positive on Alibaba, we are more prudent on Zalando. Firstly, Zalando does not make any money, whether at the EBITDA, cash flow, or EBIT level. This is very different from Alibaba for sure, but also from competitors Yoox and Asos which have been profitable from their IPOs. In addition, the stock looks overpriced. As it makes no money, we had to look at the gross margins being generated. These are around 40% for Zalando, compared to almost 50% for Asos and 38% for Yoox. However, Zalando is being priced on a EV/Sales multiple of 1.9x (and probably over 2x on the first day of trading) compared to 1.3x and 1.6x for Asos and Yoox respectively. We would advise investors that do subscribe to Zalando to “flip” it on the first day, and switch into Asos and Yoox. We also re-iterate our BUY rating on Asos and Yoox. The shares have corrected heavily and the Zalando IPO should re-focus the market on these two names.
FULL REPORT ATTACHED
Special Situations: Zalando’s IPO