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?

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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.

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