AO World slumps on Morgan Stanley downgrade

Online electrical goods retailer AO World slumped on Tuesday as Morgan Stanley downgraded its stance on the stock to ‘underweight’ from ‘equalweight’ and cut the price target to 135p from 170p.

The bank said its takeaway from the investor day in Germany was that management will not aggressively drive growth in Europe, with guidance for 30% growth over the next few years.

“Given the current trajectory (around 80% to 30% in 2Q to 3Q), even 30% may not be achievable without a significant step up in marketing spend.

“With the business still so early stage, we think developing traction in Europe will be a more gradual and volatile process.”

MS forecasts a FY17-21 28% compound annual growth rate in Europe and 8% in UK. This implies 10% for the group, £1bn by FY21.

The bank pointed out that given the European trajectory, there will need to be a step up in UK growth to reach guidance of £700-£736m for FY17, but said it remains unconvinced of AO’s long-term ability to win share.

“In the context of a more cautious macro outlook, a relatively weaker brand and strong competition, we do not see any reason why growth should meaningfully pick up.”

At 0842 GMT, the shares were down 3.6% to 153.87p.