Why I’m bearish on this FTSE 250 company (which started as a bet!)

AO World plc (LON:AO)’s origins can be traced back to a bet in a Bolton pub, but I think the company is gambling its shareholder money. Here’s why…

| 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.

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 1999 John Roberts was bet a pound by a friend in the pub that he couldn’t start up a company. In 2014 Roberts made £86 million when he sold part of his holding in AO World (LSE: AO) to list on the London stock exchange, and you could perhaps agree with him that ‘all the best businesses start in pubs’! However, since the company listed, the share price has dropped by over two thirds and has never made a profit as a public company…

Misplaced loyalty

AO World sells a variety of appliances online, although white goods are what’s best associated with the brand. The problem with white goods is that they don’t need to be replaced very often. The best online businesses like Ocado, ASOS and Boohoo (LSE: BOO)all rely on repeat business, but if you only sell goods that need to be replaced every 5-10 years then I’m not sure customer loyalty is quite so important.

AO has been running a high growth strategy where the company deliberately operates at a loss to gain market share. This is a viable strategy that is used by Amazon and Netflix among others in the online space to ‘land grab’ before raising prices to generate enormous profits. This works for businesses that strongly benefit from customer loyalty but I’m not sure this applies to the products that AO is selling. At the moment AO is simply selling its products for less than they are worth, so it makes sense that revenue and sales are growing. As the investing adage goes, ‘revenue is vanity, profit is sanity’.

Betting on Europe

The company has used fundraising to expand into Germany and the Netherlands where it has applied the same strategy to grow revenues by running at losses. But until the company is able to demonstrate it can generate profits off these revenues, I don’t think they add up to much. With some companies starting to be hit by Brexit uncertainty, I think this could add to the difficulties they are having in Europe.

John Roberts stepped down as CEO in 2017, but two years later he is back in the hot seat after his replacement stepped down from the role. After 20 years as a company, AO is still raising new capital to fund losses and there is only one way that I’d bet this company will go. It looks like The Times may have had the last laugh when they commented at the time of the company listing “on no account should any readers buy shares in this business”.

A better option?

If I was looking to buy a fast growing online business I’d prefer to buy Boohoo. It may have a high valuation but it has proved that its expansion is funded by profits rather than shareholders capital. The price has been volatile recently as shareholders have grown concerned about the management prioritising its own investments ahead of shareholders’ interests, but I still think the growth justifies the premium price. The company has grown profits (not just revenue) for the past 6 years, and looks good to continue growing!

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.

Robert Faulkner does not have a position in any company mentioned. The Motley Fool UK owns shares of and has recommended ASOS. The Motley Fool UK has recommended boohoo group. 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

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

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

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »

Investing Articles

Are HSBC shares a FTSE bargain? Here’s what the charts say!

There are plenty of dirt-cheap FTSE 100 banking stocks for investors to choose from today. Our writer Royston Wild believes…

Read more »

Three signposts pointing in different directions, with 'Buy' 'Sell' and 'Hold' on
Investing Articles

Just released: Share Advisor’s latest ‘Hold’ recommendation [PREMIUM PICKS]

In our Share Advisor newsletter service, we provide buy, sell, and hold guidance for our universe of recommendations.

Read more »