One of the best investments to have made during March’s market crash would have been to buy shares in online electrical retailer AO World (LSE: AO). Thanks to a flurry of demand for laptops and PCs generated by the first UK lockdown, the former small-cap’s value was up over 700% by yesterday’s close.
In spite of today’s half-year results however, I still can’t be tempted. Quite the opposite, in fact.
“A half-year like no other”
Revenue jumped 53.2% to £717m over the six months to the end of September. Broken down, sales in the UK moved 53.9% higher to £616.4m as people dashed to prepare for working from home. Although a much smaller part of its business, revenue from AO’s operations in Germany also climbed 85.2% to just over £100m.
At first glance, the bottom line looks even more encouraging. Pre-tax profit jumped no less than 417.1% to £18.3m following last year’s £5.9m loss.
How much?!
Commenting on today’s results, CEO and founder John Roberts reflected that the six months of trading had been “a half-year like no other” and that AO’s market had changed “forever.”
I completely agree. While I wouldn’t call time on the high street just yet, it does feel like online will become the dominant way to shop in the years ahead. Nevertheless, there remain a few reasons why I can’t be tempted to buy AO.
The main problem, in my view, is the valuation. Despite being barely profitable, the market thinks AO is now worth a staggering £1.9bn.
To justify this price tag, I need it to be the go-to destination for UK shoppers in this space. Not only is this not the case, it’s also clear AO simply doesn’t have the financial firepower to compete with the likes of, say, US giant Amazon over the long term.
As good as today’s swing to profit was, there’s still net debt of £20.7m on the balance sheet. To put things in perspective, fellow online UK retailer Boohoo has net cash of £345m. Now, that’s a war chest!
With hopes the coronavirus storm may be over by next spring, I’m also inclined to think 2021 won’t be as kind to AO as management suspects. After all, laptops, washing machines or fridges aren’t weekly, monthly, or even annual purchases.
No, if I’m to pay up for a stock, I must feel confident that recent momentum will last. This is why I’d be more likely to buy video game services provider Keywords Studios (LSE: LWS) over AO World.
“Significantly ahead”
Today, the Dublin-based business revealed it now expects full-year adjusted pre-tax profit to come in “significantly ahead of the current market consensus,” at €52m. That’s down to continued strong trading and “good cost control.“ All the more impressive, considering the disruption caused by Covid-19 on production schedules for games.
With the new Playstation 5 and Xbox consoles likely to be topping Christmas wishlists, I can see the good times continuing. Let’s not forget the exponential growth of eSports either!
Taking today’s gain into account, shares in Keywords are a little over 60% higher in value since the market crash. That’s nothing compared to AO World’s gains. But I know which business I’d be more comfortable owning.
After such a strong run, I’d be inclined to take profits on AO and run.
