This FTSE 250 growth share has risen over 300%. Should investors keep on buying?

This growth share has seen extraordinary growth of over 300%. But with normality starting to resume, can this growth continue or is it time to sell?

| 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.

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.

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.

Stuart Blair has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Playful senior couple in aprons dancing and smiling while preparing healthy dinner at home
Investing Articles

Dividend deals! 2 passive income stocks that still look undervalued

Royston Wild explains why these FTSE 250 passive income stocks might STILL be too cheap to miss, despite theirrecent price…

Read more »

Middle-aged Caucasian woman deep in thought while looking out of the window
Investing Articles

Is BT Group one of the FTSE 100’s greatest value shares?

BT's share price looks like a bargain when you look at the P/E ratio and dividend yield. Is it one…

Read more »

Frustrated young white male looking disconsolate while sat on his sofa holding a beer
Investing Articles

The National Grid share price just plunged another 10%. Time to buy?

The National Grid share price is one of the FTSE 100's most stable, and nothing much happens to it? Well,…

Read more »

Young Black woman looking concerned while in front of her laptop
Investing Articles

Up 15% in 3 months, but I still won’t touch Vodafone shares with a bargepole

Harvey Jones has been shunning Vodafone shares for years. The FTSE 100 stock is finally showing signs of life, but…

Read more »

Growth Shares

This UK stock could be like buying Nvidia in 2021

Jon Smith thinks he's missed the boat with Nvidia shares, but flags up a UK stock that has some very…

Read more »

Businesswoman calculating finances in an office
Investing Articles

The FTSE 100’s Intertek delivers a bullish update — can the share price soar?

I’d describe Intertek as a quality business with a decent dividend income, but will the share price shoot the lights…

Read more »

Market Movers

Up another 10% yesterday, how high can the Nvidia share price go?

Jon Smith talks through the latest results but flags up why further gains could be harder to come by for…

Read more »

Investing For Beginners

Down 43% in a year, I think this value stock is primed for a comeback

Jon Smith flags up why a FTSE 250 share has fallen so much in the recent past, but explains why…

Read more »