Solid revenue growth at the expense of profitability is a well-trodden path for young ecommerce firms, so why have AO.com’s numbers been so poorly received?

First of all, there’s the good news.

In spite of weakening sentiment and heightening uncertainty following the Brexit referendum, AO.com continues to deliver double-digit sales growth. The online white goods seller’s revenues passed the £700m mark, up 17% on last year’s sales.

In the three years since listing in 2014, AO’s annual revenues increased over 80%.

The problem, however, is that over the same period of time AO’s share price fell more than 60%.

Today markets greeted the news of continued growth with a further 10% fall in the share price. Weakening investor sentiment is likely to push the firm out of the FTSE 250 when the next review of listed firms takes place later this month.

The reason is simple. Even while revenues have grown, losses have widened.

The group posted an operating loss of £12m, up from £10.6m last year and significantly up on a loss of £2.2m in 2015.

Expansion weighs heavy

The fact that AO continued to maintain profitability in the UK amid post-Brexit uncertainty and rising supply chain prices is commendable, but the rapid expansion into Europe has weighed heavily on the company’s bottom line, where operating losses of £27.6m were incurred on revenues of just £71.5m.

This is a well-trodden path for ecommerce firms which face the conundrum of how long can they sacrifice profits in the pursuit of growth before investors lose patience?

“It seems that, while Amazon and Ocado came of age in a time when investors were willing to be patient and focus on growth, AO faces a much tougher market which is unwilling to wait for a long for a return on investment”

Amazon has consistently reported strong revenue growth without always delivering profitability, because of reinvestment.

During its first 20 years of trading, the ecommerce giant reported as many annual losses as profits, although more recently that investment has begun to pay off significantly.

Closer to home Ocado famously took 15 years to deliver its first operating profit in 2015, and even then the online grocery seller only delivered a paltry £7m.

Ironically, in stark contrast to AO, Amazon’s share price has risen five-fold in the last five years while Ocado’s has tripled (albeit with a few ups and downs in between).

It seems that, while Amazon and Ocado came of age in a time when investors were willing to be patient and focus on growth, AO faces a much tougher market which is unwilling to wait for long for a return on investment.

No matter how much AO frontloads its annual reports with eye-catching graphics and fonts, investors want to see numbers that add up for them, and in the current investment environment, AO’s numbers aren’t compelling enough for many of them.

”Almost 90% of AO’s sales come from the UK, which delivered an operating profit of nearly £16m”

What might also be worrying investors is the much starker outlook for the UK market.

Almost 90% of AO’s sales come from the UK, which delivered an operating profit of nearly £16m.

This reliance could come unstuck as consumer uncertainty grows and prices rise on the back of a weak pound.

Bigger ticket discretionary purchases such as white goods tend to be early casualties of belt-tightening, and UK demand for white goods is unlikely to be as buoyant in the next few years as it has been.

It could be argued that this is why AO has sunk so much money into Europe, but now it needs to ensure that it can turn these investments into profit before UK growth recedes.