If I told you about an e-commerce growth stock posting a 215% gain since the start of the year, you might think I was talking about Amazon. In fact, it’s UK online-only appliance retailer AO World (LSE: AO) I’m referring to. This FTSE 250-listed stock has bettered the US e-commerce giant Amazon’s 175% share price rise in 2020.
AO World is not a start-up. In one form or another, the company has been selling appliances online in the UK since 2001. Nearly 20 years later, it is still selling appliances online in the UK, but has expanded into Europe and has increased its product offerings. Related services like installation, collection of old products, product protection plans, and customer finance are also sold to customers.
FTSE 250 growth stock
The share price of this FTSE 250 company has rocketed in 2020 for a few reasons. A big one is that AO World has managed to post a £1.7m profit for the financial year ended 31 March 2020. This was a welcome turnaround of the trend of increasing losses from 2016 to 2019. In addition, cash flow from operations turned positive to the tune of £14m.
Another reason for the heady share price growth is related to the coronavirus pandemic. Being wholly online meant business was maintained a lot closer to normal for AO World compared to its brick and mortar competitors. AO World reported huge year-on-year growth in revenue for the four months leading up to 31 July 2020. In that period, revenue grew 58.9% in the UK and 91.5% in Germany compared to the same period last year.
Taking stock of growth
AO World can rightly be described as a FTSE 250 growth stock. Revenue has increased by 15% each year on average since 2016. Then there are those double-digit revenue jumps in the months leading up to 31 July 2020. Growth in revenue is all well and good, but a growth stock investor eventually wants to see growing profits. AO World has turned the corner into profitability. However, it should be noted that it still made an operating loss in 2020 of £3.8m. The profitability came from a big chunk of finance income and lower financing costs.
Increases in revenue lose their shine if they translate into operating losses. AO World’s operating expenses as a percentage of revenue was 20% in 2016. In 2020 it had fallen to 17%. If this trend continues then operating profits should follow, particularly with the large revenue increases seen this year. Potential investors can have a degree of confidence that this will happen. AO World’s Netherlands operation, which was responsible for significant operating losses, has now been closed.
Ok, so AO World’s operating margins can be reasonably expected to increase, opening up a path to sustained profitability. Increasing earnings, and the share price, requires revenues to keep on growing at a clip. Revenues have increased at a decent pace in the past, but can the increased pace of revenue growth seen this year continue?
Management seems to think it can. Demand for AO World’s products has been sustained even as competitors have opened their stores. Perhaps customers are still reluctant to go out shopping, but the feeling is that a structural shift in the way people shop for fridges and the like has been accelerated.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. James J. McCombie has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Amazon and recommends the following options: short January 2022 $1940 calls on Amazon and long January 2022 $1920 calls on Amazon. 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.