Unlike many other UK shares, AO World (LSE: AO) has profited from the pandemic. As an online-only household appliances retailer, this growth has been driven by the increasing popularity of e-commerce, and the fact that people have been spending more time at home. Consequently, since the middle of March, its share price has risen over 300%. But with the reopening of shops around the country, and people starting to return to normality, will the growth share be able to continue this performance?
A strong trading performance
For the four months ending July, year-on-year revenue in the UK was up nearly 60% to £400m. In addition, German revenues rose 91.5% to £67m. This was particularly encouraging as the firm has often struggled within Europe.
The other promising sign for the share was that revenues surged in both the months during lockdown and following the easing of lockdown restrictions. This proves that the revenue increase was not just a short-term boom when other shops were closed. The company said that it indicated a “structural shift in demand” that AO World should continue to profit from.
Problems with the growth share
Despite evidence of significant growth over the last few months, AO World still does have a few problems. The main problem for shares over the past few years has been its failure to make a profit. For example, in the financial year ending March 2020, the group made an operating loss of £3.8m. Although this was an improvement on the £13m loss made the year before, a consistent failure to make profits is always a worrying sign. Shareholders will therefore hope the company can generate a profit this year.
There is also the worry that this sales boom has been a one-off. Consequently, with people starting to return to work, and with significant competition from other retailers, revenues may start to fall near the end of the year. A potential lack of growth is therefore a significant problem for any growth share.
These problems may have influenced some recent insider selling by both the CFO and one of the directors. Although insiders can sell for a number of reasons, it is nonetheless a bearish signal. Nevertheless, I’d pay more attention to the CEO’s decision to buy £1.5m worth of shares a few weeks ago, a clear vote of confidence for further growth.
Would I buy AO World shares?
With the evident popularity of online shopping, AO World shares look set to profit in the long term. As a result, I believe that there is upside potential, despite the shares already being valued highly. Even so, I’m personally not buying any of the shares right now. Why? For a company that has been unable to make a profit these past few years, its share price does look high. I’d therefore want to see some evidence of sustained profits before buying this growth share.
