ASOS (LON:ASC) released its trading statement for the 3 months ended 31 May 2014 ( Group revenues were up 34% on a constant exchange basis. This is excellent, of course, but the company reduced its EBIT margin guidance to c.4.5% from c.6.5%. This factor seems to have sent the share price into a tailspin – down 31% at the time of writing.

Readers may recall that I actually did a valuation for ASC back in late March (, valuing it at £20 a share. It will be interesting to revisit my valuation. I see that in my valuation I had noted that ASC had suprisingly small EBIT margins, and tapered them down to 5% over 10 years. I clearly had a sense that I expected EBIT margins to decline, and I’m having difficulty deciding if I had been too conservative in estimating the declines, or whether the reduced EBIT margin guidance by the company is more of a one-off, and I should leave things more or less as they are.

Worth noting is that valuations done by DCF tend to be fairly stable. There are shifts, to be sure, but they are usually much more stable in their outputs than share prices which, as we have seen, can be all over the place.

There are some lessons to be learnt from the share price tumble today. First, valuation matters, and the key is patience. There will often be another opportinity to buy at a much more reasonable price. Share prices are driven by sentiment, which can be whimsical. It is better to be on the right side of sentiment – by which I mean the contrarian side – provided it’s not cheap just because it’s junk. Another point that needs raising is this: what the hell were analysts thinking when they gave the company valuations of £72 per share an upwards? It all looks too stupid in hindsight. In my valuation model – which in itself is now looking to optimistic – I didn’t get anywhere near £72. I recall, not all that long ago, that some AAA-rated fund manager (don’t quote me, but I think it was either the venerable Harry Nimmo or Nigel Thomas) who said that these kinds of companies often look overvalued, but ultimately justify their valuations. . I remember thinking at the time that…

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