2021 has not been kind to the AO World (LSE:AO) share price. Despite achieving stellar returns in 2020, these gains have been largely wiped out. And yesterday, the downward spiral continued with another 15% decline after the company released its half-year report. Consequently, the 12-month return of this stock is a disappointing -75%.
But what’s behind this disastrous performance? And should I view the falling price as an opportunity to snatch up some shares at a discount? Let’s take a closer look.
Strong retail performance
As a quick reminder, AO World is an e-commerce business that sells electrical appliances for the home – stuff like fridges, TVs and dishwashers. That may not sound particularly exciting, but with new home builds reaching an all-time high and lockdown homeowners looking to upgrade last year, demand for such appliances has been on the rise. And looking at the latest results, this demand is evident.
Despite what the crashing AO World share price would suggest, the latest half-year report detailed a solid retail performance. Revenue for the last six months came in at £760m. That’s a 67% jump versus 2019. Most of the rising sales originated within the UK. But its smaller German operations are also making decent headway, with sales nearly doubling over the same period.
What I also find particularly encouraging is the quality of customer service hasn’t dropped despite the rapid expansion. With a net promoter score still sitting above 80, customer satisfaction remains high. Why does this matter? A happy customer is a returning customer. And in a sector filled with competition wiping out pricing power, a high net promoter score can be a critical advantage in my experience.
This is obviously admirable progress for the business. So why have the shares been hit so hard lately?
The AO World share price versus supply chains
While the top line may be expanding, the same cannot be said for profits. It’s no secret that the world is suffering from supply chain disruptions at the moment. And here in the UK, the HGV driver shortage is creating substantial challenges to get products into customers’ hands.
This is a risk I highlighted last month. And it was the reason why I remained cautious about AO World’s short-term share price performance. Today, it seems that was a prudent move because management’s full-year outlook isn’t pleasant.
Combining a lack of drivers and products, along with rising inflationary pressures, the company now expects full-year revenue growth to land between -5% to 0%. Meanwhile, adjusted underlying profits have also taken a hit with guidance of £10m to £20m versus 2020’s £28m.
Needless to say, this isn’t good news for shareholders. And since the problem remains largely out of management’s control, there’s not much that can be done to mitigate these external disruptions. So, seeing the AO World share price plummet is hardly surprising to me.
A buying opportunity?
Suppose adjusted earnings for the year do reach £20m? In that case, based on today’s market capitalisation of £510m, the stock is currently trading at an adjusted price to earnings ratio of around 25. That valuation is still a bit rich for a retailer in the middle of a supply chain crisis, in my opinion. Therefore, I’m going to keep AO World on my watchlist for now.
Zaven Boyrazian has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.
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