Is the valuation of AO too high?

The business news this last week has included quite a big story about the valuation of AO, the online white goods retailer formerly known as Appliances Online.

For those that missed it, here’s what was in the Guardian (other papers took a similar view)

“But even the £1.2bn valuation is daft. AO last year made bottom-line profits of only £6.8m on sales of £275m. Punch those numbers through the calculator: 175-times earnings and 4.5-times sales for a distributor of low-margin electrical goods.”

There’s no arguing with that – these numbers are way out of kilter.

So is this the city gone mad? Possibly, probably. Too many people getting caught up in the hype of a success story that plays really well – the “£1 bet in the pub that turned a kitchen salesman into a multi-millionaire”

Valuations are an art form, not a science & investors are looking to the future. If a business can take on a mature market, like white goods, and apply some game changing methodologies to create a new business model and capture a decent market share in no time, perhaps it can do the same in other markets?

Is AO the new Amazon? There are some similarities. Amazon shook up a moribund market (bookselling) and has extended the business model and the technology to many markets and products. Maybe that’s what investors think could happen with AO?

Personally, I doubt it. I suspect that AO may be a target for Amazon, if they continue to show good progress and have some ground-breaking technology, but for now I think I’d rather sit on the side lines & watch than invest.