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Why this former FTSE 250 stock fell 76% in 2021

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AO World (LSE:AO) saw its share price drop by 76% in 2021. So what caused this former FTSE 250 incumbent’s share price to drop so significantly? Let’s take a closer look.

AO World demoted from FTSE 250 index

AO World is a retail company specialising in electrical goods and appliances for the home. These appliances include TVs, washing machines, fridge freezers, dishwashers, and more. It operates in two key markets, the UK and Germany. Once sold, AO picks and packs goods at its warehouse facility before delivering them through its own in-house delivery business as well as other logistics partners.

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When the pandemic began in 2020, many consumers were unable to spend money on leisure activities and holidays. This meant many turned to home improvements including purchasing new appliances. In addition to this, with the demand for housing outstripping supply, demand for such products was evident too.

At the beginning of 2021, AO shares were riding high at 429p per share. By the close of the year, shares had reached penny stock levels at 100p. 2020 was an excellent year for the AO share price as it rose from 90p per share to over 400p. It is worth noting that at the time of writing, AO World has been demoted from the FTSE 250 index.

What happened in 2021?

As 2021 went on, macroeconomic factors began to take their toll on AO. The well documented supply chain crisis will have affected the availability of its products. This will have led to disrupted operations and loss of custom. In addition to this, AO also suffered from the shortage of HGV drivers in the UK related to Brexit. Having difficulty in fulfilling orders for customers can often lead to them looking elsewhere. Finally, rising costs across the economy and businesses will have impacted performance. All of these factors will have affected performance and investment viability as well its eventual demotion from the FTSE 250.

AO released an interim report in November for the six months ended 30 September 2021. This report was a mixed bag which did not help the ailing share price. Revenue came in at £760m, which is a 67% increase compared to pre-pandemic 2019 levels. Customer numbers were up and new warehouse facilities had opened throughout the UK and Germany.

Despite AO recording impressive revenue, the same could not be said for profit. AO reported a loss for the interim period. In addition, net debt increased too. It is worth noting that AO is in a saturated market where competitors try to outmanoeuvre each other with lower pricing. This often places pressure on profit levels, making them very slim. Most tellingly, AO said the outlook for the full year was bleak. Revenue growth would be between -5% and 0%. Profit was forecast at £10m-£20m compared to £28m in 2020. In addition to this, AO’s German business has seen an increase in competition. This will not have helped the ailing share price as Germany is a key growth market for AO.

Final thoughts

Reviewing a turbulent 2021 for AO World, the falling share price makes sense. Macroeconomic factors, coupled with falling profits, have meant many problems have arisen a the same time for the former FTSE 250 stock. Its investment viability has taken a major hit in 2021. 

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Jabran Khan 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.

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