Up almost 100%! Has the AO World share price turned a corner?

In the long run, become a shareholder in an online white goods retailer AO World (LSE: AO) is no longer rewarding. The stock price has fallen 48% over the past five years and the company now pays no dividends.

But the stock has rallied lately, nearly doubling from its August lows. The positive news released this morning sent stocks up in early trading. Given the upward momentum of the stock in the past few months, may have turned the corner? If so, should I add it to my portfolio?

Business challenges

As an online retailer, AO World saw a sales boom during the pandemic. The result in the financial year ending March 2021 was 62% higher than the previous year. Profit after tax rose more than 2,400% to £17m. Last year, however, things went downhill. Revenues are down, although they are still about 50% greater than before the pandemic. The company made a post-tax loss of £30m.

With a recession, sales of white goods may decline. The risk is more slide in revenue for AO World, with risk to profit. I think that explains why shares fell to the kind of prices we saw in the summer.

Investor confidence seems to have increased since then. I think today’s trade announcements could add to that. The company said earnings for the first nine months of the financial year were in line with expectations, although down 17% compared to the year-ago period.

The company said today “be cautiously optimistic” and expects adjusted earnings before interest, tax, depreciation and amortization (EBITDA) of £30m-£40m, an upgrade from the latest guidance issued less than two months ago.

Strategic choice

Ultimately as an investor, I’d rather a company make bigger profits with smaller profits than the other way around. The company’s decision to reduce its business to try and increase profits – for example by closing its German business – appears to be paying off.

However, as an investor, I pay little attention to EBITDA as a measure of earnings. Interest and taxes are real cash costs that businesses face. So I’ll be looking to see if the company can raise its underlying earnings this year, hopefully bringing it back to profitability.

Can stocks continue to rise?

If the company can indeed prove that its revised strategy is helping profits, then AO World’s stock price could continue to rise. Although it almost doubled in a few months, I think the company can justify its higher price if it proves that its business model can be more profitable.

Although the recession may affect sales, long-term demand for white goods should be strong. AO World benefits from a large customer base and a well-regarded brand. I think shares have turned the corner in recent months. I’d be surprised to see him back in the summer if the current business momentum continues.

But for now, I won’t be adding the company to my portfolio. His business performance was uneven. I still see AO World as a recovery story. I’ll wait for more evidence of sustained profitability before considering buying the stock.