It has been a dramatic few years for shareholders in online appliance retailer AO World (LSE: AO). By the end of 2020, what had been penny shares at the beginning of the year were worth more than £4 each. The AO World share price then went into sharp retreat. It has fallen 70% in the past year alone.
But the long-term growth story at AO World still has promise, in my view. So is the share price crash a buying opportunity for my portfolio?
The AO World investment case
The reason for AO World’s dramatic share price growth back in 2020 was the growth prospects investors saw from people buying white goods online. Since then, a couple of things have changed. The end of lockdowns means customers can now easily shop on the high street again. An increasingly gloomy economic situation suggests many people will delay non-essential purchases. So, for example, buying a new bigger fridge when the old one still works fine will be lower down some people’s list of priorities than it would have been a couple of years ago.
In the short term that could be bad for sales at AO World. The company’s revenues shrank 6% last year compared to the prior 12 months. It has said it remains cautious about the revenue and profit outlook in the near term. As well as growing living costs hurting demand, risks including inflation and logistics problems eating into profits.
But looking further ahead, I see reasons to like the AO World investment case. It has scaled up its business successfully. While sales fell last year, they were still 52% higher than a couple of years previously. The company is now profitable and is focussing this year on cash generation. Although customer demand may subside in a recession, the long-term outlook for white goods remains strong. AO World is well-positioned to benefit from that.
Is the AO World share price a bargain?
So, if the longer term outlook is bright, why has the AO World share price crashed?
The coming years could be tough ones, hurting profitability at the firm and perhaps forcing it to boost its liquidity. Risks such as logistics bottlenecks threaten to continue indefinitely.
The company’s price-to-earnings ratio is around 15. I do not see that as a bargain, especially as I expect the company’s earnings this year may be lower than they were last year. Despite the deflated share price, the chief executive has announced plans to sell shares this year although he retains a large stake.
My next move
Although I do not see them as a bargain, I still see potential long-term value in adding AO World shares to my portfolio. I think the growth story remains attractive and the company has a lot of scope for expansion.
But the risks are also significant. If costs keep escalating and consumer spending slows, the company may need to put its energies into maintaining its existing business rather than trying to grow. That could keep the AO World share price in the doldrums for a while. I will not be buying the company for my portfolio at the moment.