AO World shares: a proper white-knuckle ride

After another spectacular share price crash, the online retailer's huge post-Covid gains have almost completely disappeared. What now?

The white-knuckle ride continues for investors as AO World (LSE:AO.) has delivered further downgrades to its revenue and earnings projections.

The company is currently in a parlous position. The well-publicised supply chain disruptions have had a severe impact, with a shortage of delivery drivers a particular issue. At the same time, the group’s foray into the German market is not only in the early stages of establishing the brand, but is also being faced by significantly increased competition. 

This in turn has necessitated an investment in systems and people (especially drivers) and increased marketing costs in Germany, which have driven a bus through previous projections. Adjusted earnings have declined by 84% over the last year, with the figure of £5 million comparing to an estimate from the company itself of between £35 million to £50 million just weeks ago. Net debt has also seen the effects of the investment, now standing at £102 million compared to £21 million a year previous. The resultant loss before tax of £10 million compares to a profit of £18 million in the corresponding period last year.

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Nor does the current situation appear to be easing. The company is anticipating poor availability in some categories for the second half as well, alongside ongoing supply issues, an increase in raw material prices and general inflationary pressures. As such, the company is expecting a much softer peak trading period than previously expected, with full-year revenue likely to be flat to minus 5%.

Amid the short-term noise, there are elements of optimism arising from a longer-term view. Since pre-pandemic, overall revenues have risen by 67%, with growth in the UK and German operations of 65% and 82% respectively. The third-party logistics business has seen revenues increase by 38.5%, including three new contracts in Germany, and the fact that AO World has now recruited more drivers to restore its levels could bode well for further expansion as other companies outsource their deliveries.

The share price has suffered from an extreme bout of volatility in recent times, as both stronger comparatives and increased competition have hit home hard. From the pandemic low of March 2020, the shares are up by 64%. However, since the 2021 January peak of 429p, the shares have plummeted by 79% and prior to today, over the last year the price had dropped by 69%, as compared to a gain of 20% for the wider FTSE 250. The 6% dip in the share price in the previous trading session leading up to these numbers was a sign of things to come, with another 29% drop on the open today.

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Despite these wild swings, the market consensus of the shares remains a buy. The undeniable shift towards online shopping, allied to the absence of a store portfolio cost drag, both provide opportunities for the business. At the same time, the group’s international aspirations remain intact and, indeed, there are signs of progress in the German market, despite its being a relative newcomer. In the meantime, however, the challenges are clear and with the shares not obviously cheap on valuation grounds, some investors have chosen to vote with their feet.