What the article fails to highlight is that the margin on selling white boxes is almost nil, so AO will never make a profit just selling appliances. Instead it has tried to do so by selling expensive insurance policies (and refuses to disclose a revenue split between appliance sales and insurance products, which should set alarm bells ringing for investors).
I'm pretty certain that this company will eventually go under.
Investing in AO World has not been for the faint-hearted. Even AO itself, which will deliver a washing machine, laptop or electric kettle to your door at the click of a mouse, declares on its website: AO isnt a normal company.
It thinks of itself as a British answer to Amazon that is redefining retailing through a devotion to happiness and amazing customer service.
It is, perhaps, possible to excuse the Bolton-based AO World for sounding more like a Californian cult than an online retailer of prosaic items such as toasters and tumble driers. But investors may find it rather less easy to forgive the company for its showing since its stock market debut in February 2014.
The shares were floated at 285p. Then led by no-nonsense founder and chief executive John Roberts, AO somehow achieved a valuation rarely seen since the little-lamented days of the late-Nineties dotcom boom. The shares jumped by a third on their first day of trading. But since that initial flurry of excitement, the tale of AO has been rather less uplifting.
A devotion to happiness? Well, maybe. But shareholders have had little to feel happy about. A series of profit warnings and disappointments have seen AO Worlds share price lumber steadily downhill. The shares closed on Friday at just 114p.
This week, AO World publishes first-half figures. And despite having been able to scrutinise AO World for 3½ years as a quoted company, analysts are still struggling to find a consensus: is this a company on the cusp of being able, finally, to fulfil the promise it appeared to show back in 2014; or are the problems it has faced so fundamental and enduring that it will continue to struggle?
The shares may have lost more than 60% of their value, but, as the old maxim goes, successful investors dont navigate by looking in the rear-view mirror. In which direction is AO World now heading?
view on AO World last week in a lengthy investment note. We believe the market has an eye on the short term and on where AO is rather than where AO will be, he wrote. His upbeat conclusion was that the companys push into continental Europe will yield market share gains and improvements in margins. No one expects the company to be profitable at the pre-tax level for a while. But, predicts Lockyer, by 2019/20, AO should finally be in the black. He reckons that AOs German operations will be profitable the 2020; the Netherlands should follow in 2021 and that will allow AO to move into France and Belgium shortly afterwards. In short, the only way is up.
But AOs detractors point out that this cheery view is founded on bold assumptions about the future. What about the here and now?
At the moment, AO is predominantly a British business. In its last financial year, no less than 90% of sales were in the UK. Furthermore, the experience so far in Europe has not been entirely happy.
At the time of the share offer in 2014, much play was made of the potential of the European market: indeed, that underpinned the argument for raising money from outside shareholders. But in its first full year of trading, losses in Europe were 10 times as high as predicted and the share price dived. And look at the situation in AOs home market. Last July, chairman Geoff Cooper said the UK trading environment remains challenging, with the market for big domestic appliances actually shrinking.
Greg Lawless of broker Shore Capital said this weekend: The fact is, UK consumer confidence is fragile. Unless people desperately need a new washing machine or vacuum cleaner, they could be reluctant to buy.
In computing, Dixons Carphone are finding life pretty tough. And over the past few weeks, the figures from John Lewis have shown electricals sales falling. There is a risk that AO could miss its targets by the year-end.
AO may eventually make good its devotion to happiness. In the meantime, investors remain sceptical. They have suffered too much discomfort.
If you base your conclusion that a company "could be a good recovery play" based upon what that company says then every struggling company fits that description. And AO spins more than most, as many have noted. You have to do some of your own analysis and thinking and not swallow PR spin.
As for AO being "EBITDA positive" in the UK, so what? It is and has always been loss making. And where does the money come from to pay the ITDA bit do you think? Debt has to be serviced. Equipment has to be paid for (especially in a technology reliant company like AO).
And I don't agree that they can make a profit shifting big white appliances. The margins are too low and the infrastructure costs are too high for it to generate any earnings from supplying goods, which is why it is entirely reliant on selling insurance policies AND why it refuses to provide a revenue breakdown between the two.
AO has a business model which will fail. And if you don't agree, that's up to you but face facts: it has utterly failed to date, so why should that suddenly change?
"AO World (LSE:AO.)LSE:AO.:AO World was one of our possible ISA contenders but unfortunately the share price has failed to make the break above the blue line into safer territory.Worse, the share has now achieved a series of lower lows, making us ..."
" AO WORLD (LSE:AO.)Â This was one of our possible ISA contenders but unfortunately the share price has failed to make the break above BLUE into safer territory. Worse, the share has now achieved a series of lower lows, making us wonder whether ..."
It depends what you mean by flawed. It's not that you can't make money flogging washing machines and tellies. The question is whether you can make enough to justify your valuation.
Dixons Carphone are trading on a PE of just under 11. For AO to equal that PE they would need at the current valuation of have earnings of £50m a year (or if you're a real optimist, based on their flotation price, earnings of £125m). They currently don't make a penny of profit, although to be fair UK EBITDA was approx. £25m last year but those earnings were wiped out by a corresponding loss in Europe. Let's assume Europe pulls round by a net £50m and can contribute another £25 million EBITDA. That gets you your current valuation - just. But that only gets us to where we are now in terms of share price and who can say when or if European profitability will come to the rescue. I'd want to see some very clear signs of revenue increases delivering profit before even considering this as a recovery play.
Also, as other posters have mentioned, there could be real regulatory risk around warranty sales and AO are not sufficiently clear on the financial contribution of this income stream to comfort me on this.
Think you're wrong - look at the analysts' research notes. Margin on white goods (after costs) is negative in all their models. AO makes its money - to the extent it makes any - on warranty policies. It's a flawed model.
If you don't believe that, take a look at the share price - what does that tell you?
AO doesn't make a loss on all its items! Price matches it will do, but it has a margin on all items sold.
Next round of advertising coming up will merely add to the 4 million happy customers already looking nowhere else but to AO, for their white goods, and a growing array of other products. AO lets go!
So, UK sales growth is stalling, EU growth continues to look impressive but is probably just a reflection of it's low starting base. Profitability capable of underpinning the astronomical PE looks as elusive as ever.
They may have happy customers but that happiness is clearly coming at a big cost to the bottom line.
So unable to find anything good to say about your bullish position in AO World, you try to switch attention to another share you like a lot. Unfortunately, that too is a dog down from 400p to 72p in under 3 years and a share you agreed was going straight to 75p ten months ago, since when it has remained resolutely below that level.
Do come back when you have a more relevant (and, if you can, a more intelligent) comment to add.
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