Even though the stock markets in the US are reaching all-time highs, things are a little more tame here in the UK. Despite that, there are some growth stocks that are leading the charge, with one FTSE 250 name up 65% in the past year. From taking a closer look at the firm, I think there’s a good chance the rally could continue.
Flipping to profitability
The company I’m talking about is AO World (LSE:AO). I’m sure many of us will be familiar with the electricals retailer, if only because of the catchy ad jingle. It offers a broad range of products, from washing machines to laptops.
A big factor in the share price movements recently has been the vast improvement in financial results. The half-year results that came out in November showed that the business has flipped from a loss in the same period the year before of £12m to a profit that time of £13m.
This is a big swing, and shows the results of the cost-cutting and efficiency drive that the business has been pursuing recently. For example, it mentioned that admin costs decreased by £9.4m over the year to £56m. This is a significant drop, with the savings helping to push up profit.
Demand going forward
Of course, a continued reduction in costs will help profit to increase further. In turn, this should allow the share price to continue to rally as earnings per share jump.
Yet there comes a point when costs can’t be cut further without hindering operations. This means AO World also need to work on boosting demand. When I look at the business, I think this is achievable.
The firm is positioning for annual revenue growth in a corridor of 10-20% for the next year. Looking forward, AO World said that “our addressable market in the UK is significant as it currently stands at £27.6bn”.
When I consider that revenue for the business has been around £1bn-1.6bn for the past few years, it’s clear that the scope for higher income is definitely there.
The main risk I see is that the market in the UK is competitive and the company’s moat is shallow. Aside from price and product offering, there’s little to differentiate retailers like AO World from its sector peers.
Under the radar
With a strong customer base of 11.6m, a strong online presence and profits, I think the business can push on for 2024. It isn’t paying a dividend, which I think is wise. Like other growth stocks, the retained earnings can be pushed back into the business, helping to fuel further growth.
I’m thinking about investing now. Even though the stock has jumped already, I think that the firm isn’t in the spotlight. When it starts to get more mainstream traction, the stock could push on higher.
This post was originally published on Motley Fool
