Important information: The value of investments and the income from them, can go down as well as up, so you may get back less than you invest.
DURING the pandemic, ecommerce growth leapt by nearly five times.1 It was the perfect environment for a specialist online retailer to flourish. Yet, the shares of AO World have tumbled since their peak in April 2021.2 It is a pattern seen among many of the UK’s highest profile ecommerce names and highlights an important lesson for investors: great ideas don’t always make great investments.
The pandemic made heroes of certain companies – Zoom, Ocado, AO.com – but the aftermath has been painful, with many companies seeing significant declines. In most cases, the businesses have continued to be operationally sound – AO.com’s revenues were 6% (six months to 30 September) ahead of the same period last year and 67% ahead of their pre-pandemic levels in 2019.3 Ocado continued to growth at a brisk 19.8% in the first half of 2021.4 Zoom continues to grow at around 35% a year, having surged over 300% in 2020.5
There are a handful of reasons why an apparently good company, exposed to a major structural trend, doesn’t fare well. One or all of these factors are at work for many of the ‘lockdown winners’ today.
The first problem is that the growth is already in the price of the shares. Once everyone knows about the great idea, there are fewer and fewer marginal buyers. Zoom use sky-rocketed during the pandemic, but the shares also moved significantly higher. Many companies simply can’t keep pace with the expectations placed on them by investors.
It may also be that there is a great idea, but poor execution. For every Google, there is another search engine that failed, Facebook had similar rivals that fell by the wayside. The idea may not be the most important element. Great ideas need great management teams to propel them forward or they wither.
Unforeseen events will also be a problem, even when the long-term trend for a particular company seems secure. For AO.com, its current weakness is largely attributable to supply chain problems. Even though demand may be there, it may not have the goods to fulfil it. The company has therefore guided the market to expect no growth in revenues for the year ahead. It is also struggling with higher inflation, which is eroding its profit margins.
The final element may be overlooked competition. Good ideas attract attention - and competitors. If a company doesn't build a big enough 'moat' round an idea, rivals may emerge and, in some cases do it better. In video-conferencing, it may be Microsoft Teams, in ecommerce, it may be the giants of the high street. Argos, Currys and Boots for example, are among the largest ecommerce sites in the UK.6
It is easy to get whipped up in a great story. However, great stories don’t always make great investments, particularly if everyone else has had the same idea. That said, it is perhaps worth noting that these dips can present long-term buying opportunities. If the problems are temporary and the business still sound, it could be time to go bargain-hunting.
1 McKinsey , March 2021
2 London Stock Exchange, November 2021
3 Financial Times, 23 November 2021
4 ComputerWeekly.com, 6 July 2021
5 Reuters, 23 November 2021
6 Datantify, 29 August 2021
Important information: Investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.
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