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Although US stock markets are hitting all-time highs, things are a little quieter here in the UK. Despite this, there are some growth stocks that are leading the charge, with a FTSE 250 65% were appointed in the last year. Taking a closer look at the company, I think there is a good chance that the rally will continue.
Turning to profitability
The company I'm talking about is AO World (LSE:AO). I'm sure many of us will be familiar with the electrical retailer, if only for the catchy advertisement. It offers a wide range of products, from washing machines to laptops.
A major factor in the recent share price movements has been the greatly improved financial results. Half-year results published in November showed the company swung from a £12m loss in the same period a year earlier to a £13m profit at the time.
This is a big change and shows the results of the cost reduction and efficiency campaign that the company has been carrying out recently. For example, it mentioned that administrative costs fell by £9.4 million over the year to £56 million. This is a significant drop, and the savings help increase profits.
Demand in the future
Of course, continued cost reduction will help profits continue to rise. In turn, this should allow the share price to continue rising as earnings per share increase.
However, there comes a point where costs cannot be reduced further without hampering operations. This means AO World also needs to work to boost demand. When I look at the business, I believe this can be achieved.
The company is positioning itself for annual revenue growth in the range of 10-20% next year. Looking ahead, AO World said that “Our addressable market in the UK is significant as it is currently £27.6bn.”
When I consider that the business's revenue has hovered between £1bn and £1.6bn over the last few years, it's clear that there is definitely scope for further revenue.
The main risk I see is that the market in the UK is competitive and the company's moat is shallow. Apart from price and product offering, there is little that differentiates retailers like AO World from their industry peers.
under the radar
With a strong customer base of 11.6 million, a strong online presence and profits, I think the business can keep going until 2024. It is not paying dividends, which I think is prudent. Like other growth stocks, retained earnings can be reinvested in the business, helping to drive further growth.
I'm thinking about investing now. Although the stock has already risen, I think the company is not in the spotlight. When it starts to gain more traction, the stock could rise.
