AO World PLC Crashes On Profit Warning: At What Price Should You Buy?

Shares in AO World PLC (LON:AO) have collapsed today — what’s gone wrong, and is the appliance retailer now cheap enough to buy?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Shares in online white goods retailer AO World (LSE: AO) opened down by a staggering 47% this morning, before recovering somewhat to currently trade around 30% below last night’s closing price.

The trigger for this collapse was a profit warning from AO, which said that revenue and earnings growth for the current quarter and the full year were likely to be lower than expected.

AO said that full-year revenue is now likely to be £470–475m, around 6% lower than expected, while profits are expected to be down, too, with adjusted earnings before interest, tax, depreciation and amortisation (EBITDA) now expected to be around £16.5m.

What’s gone wrong?

In today’s profit warning, AO said that it now believes that the extra publicity surrounding its IPO last year helped to boost sales, but says this effect now appears to be wearing off, slowing sales growth.

AO also admitted that while Black Friday helped to boost sales at the time, it didn’t generate any extra sales. Instead, sales were simply compressed into a shorter timeframe than usual.

What’s the outlook now?

AO says that its board is confident that firm’s business model remains strong, with growth potential from the ongoing roll-out in Germany, and the introduction of audio-visual sales in the UK. However, I feel that investors need to consider some other aspects of the business, in order to gain a balanced view.

Competition in this sector is vicious, and is always led by price. AO’s first-half operating margin of just 2.5% demonstrates, in my view, how difficult it will be for the firm to make meaningful profits. Indeed, AO seems to be struggling to make any profit on appliance sales: during the first half of the year, website sales of £173m were actually lower than the firm’s cost of sales, which was £176m.

My reading of AO’s accounts suggests that only £34m of ‘third-party website sales’ — extended warranties and insurance policies — helped lift the firm to an overall profit.

What are AO shares worth?

Before today’s profit warning, AO shares were trading on around 90 times 2016 forecast earnings per share. This was clearly excessive.  Even if we assume that the firm will hit 2016 forecasts for earnings of 3.1p per share, I can’t believe that the shares are worth any more than perhaps 120p — a 2016 forecast P/E of around 40. 

You may not agree with my cautious view on AO World, but today’s profit warning highlights the importance of doing your own research — and ensuring that you understand why you are buying a stock, and why you believe its value will rise.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Roland Head has a short position in AO World. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

Could this beaten-down UK growth stock be the next Rolls-Royce?

Mark Hartley feels Rolls shares have had their time and are running out of steam. Now he’s searching for the…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

Down 10% in a month! What’s gone wrong with the BAE Systems share price?

Harvey Jones suspected all was going a bit too well for the BAE Systems share price. Things went wrong immediately…

Read more »

Young Asian man drinking coffee at home and looking at his phone
Investing Articles

Are BT shares still a bargain after climbing 30%?

BT shares are finally showing signs of life after years in the doldrums. Harvey Jones thinks this may point to…

Read more »

Investing Articles

£10k in an ISA? Here’s how I’d aim to generate a ton of passive income

I dream of escaping the shackles of a salary with financial independence and a steady stream of passive income. Here’s…

Read more »

Investing Articles

Are Burberry shares a bargain or a value trap?

Appearances can be misleading in the stock market. Shares that look like a bargain can turn out to be a…

Read more »

Investing Articles

How I’d target £17,673 passive income with just £100 a week

Our Foolish writer explains how he’d build a portfolio capable of generating a life-changing passive income with limited capital.

Read more »

Middle-aged white man wearing glasses, staring into space over the top of his laptop in a coffee shop
Investing Articles

If I’d put £20k into a FTSE All-Share tracker fund 10 years ago, here’s what I’d have now

A lot of UK investors have money in FTSE All-Share tracker funds. Here, Edward Sheldon looks at how these products…

Read more »

Investing Articles

How I’d invest £10k in a SIPP to target £28,000 annual passive income

Investing just £10k today in a SIPP could be the key to a chunky retirement income in the long run.…

Read more »