Online electricals retail AO World PLC (LON:AO.) got a mild shock today as US broking giant Morgan Stanley started coverage of the stock with some cautious comments.
In a note to clients, Morgan Stanley analysts concluded: “AO's expansion outside its core expertise may not bring the desired rewards as its lack of competitive edge and weaker brand become more important as penetration increases.”
The broker noted that AO.com is the UK's leading pure online player for large electrical goods, with a 16% share of the around £3.5bn UK market for large domestic appliances such as fridges and washing machines
But it pointed out that competition is fierce in these categories, so it thinks AO's weaker brand awareness is a disadvantage.
The broker also said that “Europe remains the big opportunity” for the group “but is also costly.”
It noted that AO’s management expects Europe to break even by full-year 2020, but, with a history of earnings downgrades, the broker thinks it could take longer.
Morgan Stanley initiated coverage on the stock with an ‘equal-weight’ rating and a price target of 170p, 8% below last night’s closing share price, calling the valuation “undemanding”.
AO World shares this afternoon were changing hands at 182.9p, down 1.1p on the day.