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

Asian man looking concerned while studying paperwork at his desk in an office
Investing Articles

After gaining 34% in a month, is the Nvidia share price now uninvestable?

Our author says the Nvidia share price is very high at the moment. He's cautious when considering investing in the…

Read more »

Businessman use electronic pen writing rising colorful graph from 2023 to 2024 year of business planning and stock investment growth concept.
Investing Articles

This under-the-radar FTSE 100 share has hiked dividends 13.7% a year for a decade. Time to buy?

Harvey Jones is kicking himself for missing out on this FTSE 100 share that's kept investors happy with long-term share…

Read more »

British union jack flag and Parliament house at city of Westminster in the background
Investing Articles

Labour winning the general election would be positive for UK stocks, says JP Morgan

One mega-bank thinks certain UK stocks could benefit following the 4 July election. This writer considers a FTSE share that…

Read more »

Older couple walking in park
Investing Articles

No savings at 40? Here’s how I’d aim to retire comfortably with FTSE 100 stocks

It's never too late to begin investing in FTSE 100 stocks for retirement. Royston Wild reveals three steps to help…

Read more »

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

Down 17%, is National Grid’s share price a FTSE 100 bargain?

National Grid's share price has taken a battering following a multi-billion-pound rights issue and dividend rebasement. Is it now too…

Read more »

Environmental technology concept
Investing Articles

Up 150% this year! Can NVIDIA stock keep on soaring?

Christopher Ruane explains why NVIDIA stock has soared over 150% already this year, where it might be going -- and…

Read more »

Investing Articles

Down 44% in a year, here’s why the Aston Martin share price could keep struggling

Not only has the Aston Martin share price collapsed in recent years, our writer sees its current business performance as…

Read more »

Investing Articles

I’m considering these 2 high-growth stocks to buy as a technology investor

Our author thinks Kainos and Softcat could be two of Britain's best tech investments. He thinks the risks in the…

Read more »