Shear folly or share folly

The UK domestic appliances market is worth £3.2 billion a year. It is notoriously low margin.

AO World (formerly Appliances Online) which trades as AO.com was set up by John Roberts as a bet and now enjoys 25% of all online sales of large domestic appliances. Well done Mr Roberts.

In the year to 31 March 2013 it had revenues of £276 million and made profits of (wait for it) just £8.7 million (I said it was low margin), yet on its debut yesterday the price of its shares rocketed to 378p from 285p. This valued the company at £1.6 billion or half of the annual sales of the market in which it operates.

Put it this way, if AO World had a monopoly of its market and it maintained the same margins that it had for 2013, the company would have profits of only £100 million. Yet now with a mere 8.6% of the market it is valued at 184 times profits.

But then I’m an Insolvency Practitioner who has been practising for 39 years, lived through several property crashes, the dot.com crash of the 1990′s and numerous recessions. What do I know?