The AO World share price is in pennies. Should I start buying?

The AO World share price has collapsed. Our writer still sees promise in its business model — but is he willing to invest in the retailer?

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Retailer AO World (LSE: AO) specialises in white goods such as fridges and dishwashers. But while such appliances rely on a constant supply of power, one thing that has been noticeably lacking in this area lately is the AO World share price. It has collapsed by 80% in the past year and now trades for pennies.

But AO World has carved out a sizeable business in the digital retail space, an area I expect to grow more in future. Could its dramatic share price fall offer a buying opportunity for my portfolio?

Stuttering performance

AO World saw revenues shrink 6% last year. But they were still more than 50% larger than they had been two years previously. That suggests the company has been able to hold onto a lot of the sales gains it saw during lockdowns.

More alarmingly though, the company swung from a £20m profit the prior year to a £37m loss in its most recent 12-month reporting period. Looking ahead, the company’s chief executive said: “We certainly have more volatility to navigate.”

Reasons for optimism

Most of that sounds unreassuring. Sales are falling, the company has swung sharply into the red and we are now in a recession. This is where consumers may decide to postpone or scrap the purchase of white goods that cost hundreds and sometimes even thousands of pounds. That could hurt AO World’s sales further. If sales fall but costs do not come down at the same speed, it might also be bad news for profit margins.

However, I see grounds for optimism when it comes to the company’s future. While some white goods purchases are discretionary, a lot are not. If people move into a new home without a washing machine, for example, I think most will choose to buy one.

AO World has built a strong position in this market. It has boosted its liquidity by issuing more shares over the summer. The company is also leaving the German market. Whether or not that is the right decision from a long-term strategic perspective, I do think the move makes sense now.

AO World is battening down the hatches due to an economic storm. I think focussing on its key UK market is smart. It can always try to expand internationally again once the economy is stronger.

My move on AO World

I have confidence in the company’s management, which has done a great job building the business in recent years. If the firm rides out the recession and continues to build a strong position in the UK market for white goods purchases, I think the current AO World share price could come to look like a bargain.

But although I am optimistic, I think the risks are sizeable. The company has a limited track record of profitability. It operates in a highly competitive market. It may need to boost liquidity further if it keeps racking up losses, which could lead to more shareholder dilution.

Looking first at risks rather than potential rewards, I realise that I can invest in other retailers I think face less sizeable challenges. So I do not plan to buy AO World shares for my portfolio.

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.

C Ruane 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.

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