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AO World – back above 400p and back to being overvalued again?


AO World PLC (LON:AO. shares floated in March 2014 at 285p, rose above 400p in the initial share-buying frenzy and then fell off a cliff.

By October of that same year, the shares of the online white goods retailer were languishing at 113p and there was much grumbling about how ludicrously overpriced the initial public offering had been.

Its flotation price gave it a market capitalisation of GBP1.2bn, which was three times its turnover at the time; its annual profits were a paltry GBP8mln. Clearly, institutional investors such as Aviva and Crispin Odey who were early backers of the company were not valuing the company on traditional valuation grounds.

Those investors were playing the long game and banking on exceptional growth from a retailer that was operating on a different model to the market leader (at the time) in white goods, Curry’s.

Sceptics said the initial public offering was overpriced

There were sceptics but so there was also with Ocado Group PLC (LON:OCDO), another online specialist that for years looked massively over-valued.

Shortly after floating, the company quickly moved into selling television sets (in time for the 2014 World Cup) and expanded into Germany.

“I think the German consumer is just as logical as UK consumers,” The Guardian newspaper quoted founder John Roberts as saying.

“People ask how can a business be valued at that when you make 11mln quid but if you believe in that [growth in Europe], wow it’s cheap,” Roberts said.

Having said all that, it has taken AO World six years for its share price to get back to that frothy 400p valuation; its shares currently trade at 390.5p, after falling 29.7p today on the back of a half-year report that failed to live up to the expectations that had seen the share price soar from 50p since the time of the (first) UK lockdown announcement, on March 23.

“Companies suffering from the impact of the pandemic are easy to find, particularly in the retail space. On the other hand, for those reaping extreme benefits, it is unnecessary to look any further than AO World,” said Richard Hunter, the head of markets at interactive investor.

“Comfortably the best performer in the FTSE350, the shares have risen by an extraordinary 365% in the year to date,” Hunter noted.

“Bulls of the stock will also be heartened to hear that the company believes the growth in online purchases, particularly for its major domestic appliances, represents a permanent shift in consumer habits,” the veteran stock analyser continued.

That is probably the nub of the matter when calculating whether AO World’s stratospheric share price trajectory can continue.

No going back after lockdowns end?

When the lockdown ends, there will still be a purpose for physical stores, located in giant barns on the edge of town or in quirky department stores in the Home Counties and that purpose will be to go and check out the products in person and then go home to buy them from another retailer on the internet.

Of course, AO’s bricks & mortar-based competitors will further develop their online operations as fast as they can, after which it becomes a matter of execution – who can deliver the best products, promptly, at the best prices. AO World appears to be the form horse in this field.

Of course, the lockdown restrictions have been very kind to AO World, leading to a boom in demand that the company has worked hard to meet.

“The investments we continue to make in infrastructure, expertise of our teams and strong supplier relationships means that we have successfully managed the increase in customer demand whilst maintaining our extremely high levels of customer service, delivering consistently high NPS scores. In the UK, we significantly increased capacity in our logistics network with new warehousing, outbases, vehicles and drivers,” the company said in its half-year report today.

As well as keeping Mr & Mrs Staycation happy, the company has been keeping its business-to-business customers sweet.

“We have experienced growth across our differing customer bases and added new market segments as we continue to build our partnerships, solving their supply chain issues and providing them with high service levels and strong levels of stock availability. In particular, we are seeing demand for our services growing amongst housebuilders and their pipelines continue to build. We are approved for six of the top 10 UK housebuilders and are receiving a favourable response to the majority of tenders,” the company said.

As for that expansion into Germany and its “logical” customers, the company claims to have made considerable progress but the operation is not expected to be profitable until 2022.

“For the group as a whole, there may be some doubts as to whether the exponential growth can be maintained post-pandemic as bricks and mortar competitors find their feet once more, while the financial impacts of Covid-19 and Brexit are likely to lead the UK towards some turbulent economic times,” Hunter cautioned.

AO World is confident European online electrical markets present it with a significant opportunity on which to capitalise – at least it is not thinking of moving into that graveyard of British retailers, the US – as the European market is said to be less mature than the UK.

The stock has certainly rewarded the patience of shareholders who ignored those grumbles about an overpriced flotation back in 2014 and it deserves its reputation as a slick operator – plus it gets extra brownie points for using a Ramones song on its adverts.

However, if you take the view that sooner or later the whole retail world is going to be dominated by Amazon, with its close-to-the-wind working practices and army of tax advisors, then shareholders could be forgiven for taking profits now.

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