Key points

• AO World’s share price is down over 78% in the past year on rising logistical challenges.
• The company sells over 8,500 different products online and welcomed over two million new customers in 2021. 
• Analyst forecasts indicate a potential buying opportunity has emerged.

The AO World Plc (LSE:AO) share price is down by over 55% year to date and 78% over the last 12 months. But following its latest results, the stock just surged by double digits!

While the stock market volatility has sent many businesses into the gutter, was this just a case of short-term panic?

Let’s take a closer look at what’s going on to see if I should consider the recent performance as a buying opportunity for my portfolio.

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Key Financial Information of the AO World

As a quick reminder, AO World is a leading online-only electricals retailer based in the United Kingdom. It sells big and small domestic appliances, a range of mobile phones, TVs, consumer electronics, and laptops, among other things.

As an e-commerce business, management has developed in-house logistics solutions with carefully selected partners that, as of 2014, extend into Germany.

Shares are listed on the London Stock Exchange and, at the current AO World share price, are trading at a market capitalisation of around £234m.

The full-year report ending in March 2021 shows that it had £760m in revenue – a 67% jump versus 2020. The group also reduced its debt by £20m while retaining a decent liquidity position of £66m and a cash flow of £56m. Meanwhile, its recently struggling German operations are currently undergoing a strategic review due to the disruptions created by the pandemic.

But overall, things seem to be fine, financially speaking. So why has the stock price collapsed since publishing these results?

Why did the AO World share price fall?

AO World shares have been experiencing a significant downward trend. And is likely linked to the uncertainties surrounding this business and the challenges it’s currently experiencing.

During lockdowns, demand for appliances online unsurprisingly surged. After all, with everyone stuck at home and brick & mortar stores closed, many households opted to renovate, as well as equip themselves with home offices.

But those tailwinds are now over. Other retailers have reopened their doors, workers are returning to the office, and demand for electronic goods has declined. The situation hasn’t been helped by the rising cost of living triggering a consumer spending slowdown.

Paring that with rising shipping costs, inflation pressure, and poor product availability due to supply chain disruptions, AO World’s profit line has dipped back into the red. Its full-year results for 2022 saw a shrinking top line, earnings evaporate on higher costs, and cash flows become compromised.

However, since these results weren’t as bad as investor expectations had predicted, the stock is up. To me, that indicates that shares were, in fact, oversold. But can this sudden upward momentum continue?

What lies in store for AO World’s share price?

Given the volatile stock market conditions we’ve seen over the past year, it’s not unexpected to watch this stock fall so sharply. But have investors overreacted?

Ultimately the problems plaguing the bottom line stem from short-term disruptions. Management has already adjusted its strategy to focus on cash generation to shore up the balance sheet. Meanwhile, cost-cutting initiatives are in place to accommodate the drop in revenue.

In other words, AO World is taking the necessary stems to weather the ongoing storm. At least, that’s the impression I’m getting.

Analyst and broker forecasts are predicting that profitability won’t return until early 2024. Yet even with this bleak outlook, the average price target for the AO World share price is 65p. Compared to today’s share price of 48.5p, it suggests an investment opportunity still exists.

Time to buy?

Management’s strategy shift seems sound, in my opinion. And with the balance sheet on track to strengthen, I am cautiously optimistic about the future of this stock – an opinion shared by other analysts, it seems.

Having said that, I’m personally not tempted to add this retail stock to my portfolio today. I believe there are far better buying opportunities available in companies that have a much stronger position and larger long-term growth potential. Therefore, I’m keeping AO World on my watchlist for now.

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Prosper Ambaka does not own shares in any of the companies mentioned. The Money Cog has no position in any of the companies mentioned. Views expressed on the companies and assets mentioned in this article are those of the writer and therefore may differ from the opinions of analysts in The Money Cog Premium services.