Early 2022 continues to be a trying time for UK investors. I think there’s one FTSE stock whose owners are feeling the pain worse than most.
70% down!
Online electrical-goods retailer AO World (LSE: AO) was a huge beneficiary of the multiple UK lockdowns. The once-in-a-lifetime pandemic temporarily turbocharged revenue at the Bolton-based business and nimble investors charged in while the going was good.
Since then, however, it’s all been downhill. In fact, the share price has now crashed 70% in the last 12 months. If anything, this highlights the risks involved in buying single company stocks lower down the market spectrum. It also serves as evidence that not every online retailer will thrive.
As someone who isn’t afraid to adopt a contrarian mindset in the pursuit of long-term gains, I’m pushed to ask whether such a huge fall in the share price is justified. Regrettably, I think it is. In fact, I think the outlook looks increasingly bleak for the shares.
Strategic review
Last month’s Q3 update hardly inspires confidence. While UK revenues were “broadly stable” on a one-year comparative, the company is clearly finding things a lot harder in Germany. According to AO World, trading in the latter has been “significantly impacted” by a toxic mix of increased competition, higher marketing costs and supply chain disruption. Since these trends are expected to continue “for the foreseeable future“, it’s now conducting a strategic review of this division.
If AO World had a global presence, such a move wouldn’t worry me so much. But knowing that Germany represents its only other market — ironic given the company’s name — is deeply worrying.
Shorters assemble
It’s not just me thinking things could get even tougher for AO World. Right now, the battered growth stock is the fifth most shorted company on the London Stock Exchange. In other words, a significant number of people are betting that the share price still has further to fall.
For balance, it’s worth remembering that shorters can sometimes be spectacularly wrong in their judgement. If trading recovered then those betting against the company would be forced to close their positions as quickly as possible to avoid huge losses. This activity, when combined with long-only investors piling in, could theoretically lead to this FTSE stock’s value exploding. AO World’s small free float (the percentage of a firm available to buy and sell on the market) might help to move the needle to an even greater extent.
How likely is this to happen? The odds aren’t great based on what I’m seeing.
Better bets than this FTSE stock
Now, AO World can talk all it wants about the rise in online shopping. To stand a chance of making me money, however, I need to see that it’s taking the battle to the substantial competition it already faces. The trouble is, I’m struggling to spot the ‘moat’ that master investor Warren Buffett advises we all hunt for.
If I were looking to invest my finite capital in UK growth stocks today, I’m certain that this FTSE stock wouldn’t get on my buy list. Why take the chance here when I can buy quality companies like these that should compound in value over many years instead?
Paul Summers 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.
