AO World – looks like a penny dreadful to me

AO World is an online retailer of domestic appliances. Its shares dropped 14% yesterday to 140p on the back of its interim report (http://is.gd/zNwKpG). Revenues grew 21.7%, but it suffered an operating loss of £8.9m (2014: £0.9m profit) “reflecting the ongoing investment in German operations and start-up costs in further Europe territories”.

I am not convinced by the story here. AO floated in February 2014, which puts it in the high risk category as far as I’m concerned. I suspect, but of course cannot prove, that there was a lot of “malice aforethought” in the timing of the float in that they knew they would expand heavily into Germany and that it would hit margins. They therefore wanted to show some nice fat numbers at flotation before hitting investors with a surprise. A dirty tactic, to be sure. It’s just my theory, of course, but if the shoe fits …

The company has a market cap if £590m, revenues of £477m, but no profits. I am not seeing the attraction here. The share price is well off its 52w high of 336p, so I can’t see momentum investors having a play with it. It hardly seems to be in value territory, either. So, if I had to guess where the share price will go next, “up” would not be it.

Maybe it’s headed down to a lower support level in the 120-130p range in the short (few weeks) term. BWTFDIK?

Verdict: story stock that burns investors. I won’t be investing.