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AO’s nightmare before Christmas

by LLB Reporter
23rd Nov 21 12:24 pm

After being one of the best performing names on the UK stock market in 2020 with a 355% share price gain, AO has come back to earth with a bump. Its shares have been in freefall for some time and today’s warning means the stock is now down 78% year to date.

Higher costs, stock availability issues and fierce competition in Germany are all to blame for its woes. The company remains optimistic these are short-term problems and that the structural shift in favour of e-commerce will ultimately benefit the company. However, when you’re only earning small margins, any increase in costs will have a big impact on profitability and so AO is really feeling the pain at present.

Fundamentally AO’s proposition is sound – it offers a wide range of products at competitive prices and it has a good reputation for top notch customer service. These days if you order something online, you want the experience to be as painless as possible and that includes taking delivery of the item, and AO ticks the right boxes.

“The ongoing challenge to its business model is the fact there are so many other companies offering the same proposition via the internet. Not only does that mean competing on price, but it also means competing for online advertising space such as bidding for the favourite search terms, and that is one area where AO is incurring extra costs,” said AJ Bell’s Russ Mould.

“AO has gone from being a lockdown winner to a post-vaccination era loser. It did so well during the early stages of the pandemic, selling computers to people working away from the office, freezers to people stocking up on food, and TVs to families looking for a sharper picture as they try to entertain themselves at home. Now some of those tailwinds have faded, and it has also been struck by supply chain issues meaning it can’t offer everything that people want.

“Having cracked the UK market pre-pandemic, a lot of AO’s growth story was pinned on success overseas, led by Germany. That’s now looking a bit shaky as Germany has proved to be a much harder market in which to excel. If AO decides it can’t expand profitably overseas, then a lot of investors are going to take a hard look at the business and its share price could experience even more pain.”

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