Could a potential recovery make this falling penny stock an exciting opportunity?

This penny stock has seen its shares fall recently. Should this Fool buy cheap shares as the business sets out its stall for a recovery?

| 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.

pensive bearded business man sitting on chair looking out of the window

Image source: Getty Images

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.

Penny stock AO World (LSE:AO) has seen its shares on a downward trajectory lately. Recent events have led to the business setting out a new strategy with a focus on cutting costs, growth, and becoming a consistently profitable business. Could now be an opportunity to buy the shares for my holdings?

AO shares fall

As a quick reminder, AO is a retail business specialising in electrical goods and appliances for consumers’ homes. It operates in the UK and Germany. Its business model involves picking and packing goods consumers buy, before delivering them through its own delivery business as well as other partners.

So what’s happening with AO shares currently? Well, as I write, they’re trading for 43p. It is worth remembering a penny stock is one that trades for less than £1. At this time last year, the stock was trading for 212p, which is a 79% decline over a 12-month period.

Pandemic spending boosted AO shares, however since the turn of the year, macroeconomic factors have negatively affected operations and profit margins. Furthermore, recent events within the business have not helped either.

Recent events and refocused strategy

Two weeks ago, AO shares suffered once more when the firm announced it needed to raise £40m to shore up its financial position. This is rarely a positive sign so I understand why the shares fell further. It will raise the funds by selling new shares at 43p per share.

AO has confirmed the funds will be used to maintain its credit rating, which is important, as this allows it to sell stock before it needs to pay its suppliers. Furthermore, it has decided to close its troubled German operations too. Next, it has decided to venture into new product lines and discontinue others as the new strategy begins to take shape. A major aspect of the new strategy is to cut costs, which should help boost its balance sheet and improve its chances of sustained profitability.

I do understand that AO’s past performance is not a guarantee of the future, but I wanted to know a bit more before reviewing its new strategy and deciding whether to buy shares in the penny stock. I noted that it has only reported a profit in four of 11 years as a listed company. In a saturated market, it seems competitors are getting the better of AO.

A penny stock I’m avoiding

There is every chance that this cash injection, and the new initiatives to cut costs and boost growth, could reap rewards for AO. But current macroeconomic headwinds will not help. Nor will the current well-documented cost-of-living crisis here in the UK, which could result in consumers spending less on electronic goods.

I did note that full-year results for the year ending 31 March 2022 have been delayed due to the recent review. I’ve decided to keep AO on my watch list for now. There are too many uncertainties putting me off. There are better stocks out there with better fundamentals and better prospects of consistent and stable returns that I prefer.

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.

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.

More on Investing Articles

Investor looking at stock graph on a tablet with their finger hovering over the Buy button
Investing Articles

Forget Lloyds’ cheap share price! I’d rather consider this FTSE 100 bargain share

Lloyds' share price might appear too cheap to miss at first glance. But this FTSE-listed share could be a better…

Read more »

Market Movers

Down 6% today, is the BT share price gearing up for a larger fall?

Jon Smith points out why the BT share price has tumbled today, but flags up why the reasoning behind the…

Read more »

Silhouette of a bull standing on top of a landscape with the sun setting behind it
Investing Articles

This FTSE 100 stock is down 25% from its 52-week high. Should I buy?

Analysts think the price-to-earnings ratio of this FTSE 100 stock could fall by half in the next two years if…

Read more »

Investing Articles

£10,000 invested in Nvidia stock just two weeks ago is already worth…

Nvidia stock's been making big losses and big gains so far in 2025, at least on paper. But long-term valuation…

Read more »

Stack of British pound coins falling on list of share prices
Investing Articles

Here’s why Lloyds shares have dipped sharply

Lloyds shares got a boost recently when the Treasury petitoned the Supreme Court to go easy on the car loan…

Read more »

A young woman sitting on a couch looking at a book in a quiet library space.
Investing Articles

A £10,000 investment in BAE Systems shares 5 years ago is now worth…

BAE Systems' shares have lifted off since the start of the decade. But can the FTSE 100 defence giant continue…

Read more »

Dividend Shares

£8,000 invested in high-yield dividend stocks could make this amount of passive income

Jon Smith explains how dividend shares with yields in excess of 8% can be used carefully in order to build…

Read more »

Investing Articles

£5,000 invested in Tesco shares 2 years ago is now worth…

Over the last two years, Tesco shares have provided investors with gains of around 30% per year when dividends are…

Read more »