Up almost 100%! Has the AO World share price turned a corner?

The AO World share price has nearly doubled in just a few months. Despite more good news from the company today, Christopher Ruane isn’t yet ready to invest.

| 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.

Happy young plus size woman sitting at kitchen table and watching tv series on tablet computer

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.

In the long run, being a shareholder in online white goods retailer AO World (LSE: AO) has been unrewarding. The share price is down by 48% over the past five years and the company does not currently pay dividends.

But the shares have soared lately, almost doubling from their August lows. Positive news released this morning sent the shares up in early trading. Given the upward momentum of the stock in the past few months, might it have turned a corner? If so, ought I to add it to my portfolio?

Business challenges

As an online retailer, AO World saw sales boom during the pandemic. Revenue in its financial year ended in March 2021 was 62% higher than the prior year. Post-tax profits soared over 2,400% to £17m. Last year, however, things came down with a bump. Revenue fell, although it was still around 50% bigger than before the pandemic. The company crashed to a post-tax loss of £30m.

With recession biting, white goods sales could fall. That risks further slides in revenue for AO World, with a risk to profitability. I think that explains why the shares fell to the sorts of prices we saw over the summer.

Investor confidence seems to have increased since then however. I reckon today’s trading announcement could boost it further. The company said that revenue for the first nine months of its financial year was in line with its expectations, despite falling 17% compared to the equivalent prior year period.

The company said today it is “cautiously optimistic” and expects adjusted earnings before interest, tax, depreciation and amortisation (EBITDA) of £30m-£40m, an upgrade from its most recent guidance issued less than two months ago.

Strategic choices

Ultimately as an investor, I prefer a company to make bigger profits on smaller revenues than the other way around. The firm’s decision to slim down its business to try and improve profitability – for example by closing its German business – appears to be yielding results.

However, as an investor, I pay little attention to EBITDA as an earnings measure. Interest and tax are real cash costs that businesses face. So I will be looking to see whether the company can successfully boost its basic earnings this year, hopefully turning a profit again.

Can the shares keep rising?

If the company can indeed prove its revised strategy is helping profitability then I think the AO World share price could keep rising. Despite almost doubling in a matter of months, I think the company could justify a higher valuation if it proves that its business model can be more profitable.

Although a recession could hurt sales, long-term demand for white goods should be strong. AO World benefits from a large customer base and well-regarded brand. I think the shares have turned a corner in recent months. I would be surprised to see them fall back to their summer lows if the current business momentum continues.

For now though, I will not be adding the company to my portfolio. Its business performance has been uneven. I still see AO World as a recovery story. I will wait for more evidence of sustained profitability before considering whether to buy the shares.

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.

More on Investing Articles

Smart young brown businesswoman working from home on a laptop
Investing Articles

Should I be watching the Greatland Gold (LSE: GGP) share price?

Recent rallies in valuable metal prices has boosted the Greatland Gold share price, but is there still an opportunity for…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

The abrdn share price is down 23% in the last year, should I buy?

Asset management firms have had a rough time lately, but with the abrdn share price down heavily, is now the…

Read more »

Hand of a mature man opening a safety deposit box.
Investing Articles

If I’d invested £5k in red hot BAE Systems shares 5 years ago here’s what I’d have today

BAE Systems shares have smashed the FTSE 100 for years and Harvey Jones is keen to buy more as they…

Read more »

Investing Articles

How I’d aim to earn £16,100 in passive income a year by investing £20k in a Stocks and Shares ISA

Harvey Jones is building a portfolio of high-yielding FTSE 100 dividend stocks that should give him a high and rising…

Read more »

Investing Articles

Down 8% in a month! The BP share price is screaming ‘buy, buy, buy’ at me right now 

When crude oil falls, the BP share price invariably follows. Harvey Jones is wondering whether this is the right point…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

Could the 9.8% M&G dividend yield get even bigger?

Christopher Ruane reckons that, although the M&G dividend yield is already close to a double-digit percentage, it could get better…

Read more »

Investing Articles

How much passive income could I earn by putting £380 a month into a Stocks and Shares ISA?

Christopher Ruane explains how he'd aim to turn a Stocks and Shares ISA into four-figure passive income streams each year.

Read more »

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

2 passive income stocks I’m buying before an interest rate cut

With the market expecting interest rates to fall in August, time might be running out for investors looking to buy…

Read more »