Why has the AO World share price just crashed 20%?

AO World (LSE: AO) has been in a steady decline for much of 2021. But it had been slowly creeping back ahead of first-half results. A trading update Friday halted that, and the AO World share price crashed 20% in morning trading. Am I seeing a buying opportunity?

AO warned of lower profits for the year, due to the UK’s current supply chain problems. And that’s all down to a shortage of lorry drivers, after tens of thousands headed back to their home countries after Brexit. AO says it now expects “adjusted EBITDA for the full year to be between £35m and £50m, with profits more heavily weighted than usual towards the second half of the year driven by the peak trading period.”

Sales figures, though, look decent so far. AO reported a 5% rise in like-for-like revenue in the half. And that compares to a previous period in which Covid lockdowns had given the firm a boost. Laptop computers, phones, and home electricals, were all in demand from people stuck at home with nowhere else to go spend their money.

I think the pandemic effect shows when we peek further back at the AO World share price. We’re looking at a 57% slump since the beginning of 2021, and an 18% fall in the 12 months since October 2020. But those simple measures hide a more interesting picture.

AO World share price volatility

From the onset of the coronavirus crisis in mid-February 2020, to a peak in early January this year, AO shareholders enjoyed a whopping 465% price gain. The subsequent 2021 fall doesn’t look like such a disaster in that wider scheme of things.

Anyway, back to the latest trading update. AO reckons we need to look back two years ago to get a better feel for the underlying long-term direction of the company. I think that makes sense. On a two-year like-for-like basis, revenues grew by 66%. In the UK, revenue is up 63%, and in Germany 84%.

Whether I’d buy depends on my take on the company’s current valuation. We don’t have any profit figures yet, and will have to wait until 23 November to get those. So I’ll do a quick finger-in-the-air estimate. AO put its adjusted EPSfor 2020-21 at 5.1p. If it increases this year in line with the 5% rise in H1 revenue, we should see a full-year EPS of 5.4p. On the current AO share price, that would be a P/E of 31.

Conflicting valuations

That’s lofty for a retailer. It can happen, though, when a company is first turning to profit. But if we up last year’s revenue by the same 5%, that suggests a Price to Sales ratio (PSR) of around 0.5. Now, thin-margin retailers tend not to command high PSR multiples. But even then, I don’t think this is too stretching.

My other big bugbear, debt, doesn’t seem to be a problem. AO’s net debt stood at a mere £28m at year-end, down 71% from the previous year.

I envisage conflicting influences on the AO World share price over the next year or two. Our economic outlook is still shaky, and the pandemic effect surely still has further to unravel. But on balance, I’m adding AO World to my list as a cautious Stocks and Shares ISA candidate.

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Alan Oscroft 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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