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The AO World share price crashes 25% in one day. Time to buy?

The share price of AO World (LSE:AO) collapsed last Friday following a disappointing trading update. The stock plummeted by nearly 25% in one day, bringing its 12-month performance to a -28% return. But was this update as bad as investors seem to think? And is this actually a buying opportunity for my portfolio? Let’s take a closer look.

The falling AO World share price

As a reminder, AO World is an online retailer of home electrical appliances such as fridges, TVs and dishwashers, among others. With lockdowns keeping most people at home, the business saw quite an uptick in sales last year. In fact, that’s what caused the AO share price to jump by nearly 400% in 2020.

Since then, the stock has been declining, which was only accelerated by its latest trading update. Due to the ongoing supply chain disruptions caused by the pandemic, and the current shortage of delivery drivers, UK sales over the last six months grew by a measly 6%. And its German operations didn’t fare much better, as fierce competition led to lacklustre revenue growth of only 3%.

So, it’s hardly surprising to see the AO share price fall on this news, especially since management expects similar performance throughout the rest of its fiscal year. Consequently, the company has provided EBITDA guidance of £35m to £50m. Even if it can achieve the higher number, that’s still a 22% decline from a year ago. But as disappointing as this news is, could this be a buying opportunity?

A potential comeback

Seeing revenue stagnate and profits fall is never fun. However, in the case of AO World, the catalyst is ultimately a short-term problem. The supply chain issues are slowly working themselves out as the pandemic comes to an end. And giving it the benefit of the doubt, a solution to the driver shortage is currently being devised by the UK government. In other words, 2022 onwards may prove to be a far more successful year for this business.

What’s more, despite these problems, revenues still remain firmly ahead of pre-pandemic levels. Compared to 2019, sales for the last six months are up 63% and 84% for the UK and Germany, respectively. Given that 2020 was an exceptional year for e-commerce sales, this seems like a more meaningful comparison. And needless to say, this growth is quite impressive.

If the existing operational disruptions can be resolved by 2022, I think the AO share price could be set for a relatively rapid recovery.

The bottom line

All things considered, AO World continues to look like a strong business, despite the ongoing problems. Having said that, these issues are ultimately out of the control of management. And in my experience, that’s not a good trait to have. Therefore, I’m going to keep this stock on my watchlist for now, even though the current AO World share price might be on discount.

The post The AO World share price crashes 25% in one day. Time to buy? appeared first on The Motley Fool UK.

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Zaven Boyrazian has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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