In under one year, Ocado Group (LSE: OCDO) has gone from being one of the most derided stocks on the market to something of a darling among investors.
A series of licencing deals with international retail giants have seen loyal holders rewarded with a 350% rise in the share price between late November and late July, helped by a squeeze on short sellers — those who questioned its ability to ever come good and bet that its value would eventually fall.
This makes today’s Q3 trading update from the Hatfield-based company — covering the 13 weeks to 2 September — all the more fascinating to read.
The robots are here
The £6.2bn cap saw retail revenue rising 11.5% to £348.6m compared to the same three months in 2017. This was in line with guidance, albeit slightly down on the 11.7% achieved over the first half of the current financial year.
The average number of orders received per week by the company rose by almost exactly the same percentage to 283,000, with the average value of baskets pretty much identical to that reported from the last Q3 (£106.26). Since the latter has been gradually falling over recent years, this is actually quite encouraging.
The only other numbers released by the company today related to its balance sheet. Supported by recent placings, Ocado had cash (and equivalents) of £406.1m and borrowings of £281.2m at the start of September.
In addition to these numbers, the market was also treated to an update on the company’s new Customer Fulfilment Centres (or robotic warehouses) at Andover and Erith. The second of these, due to be “the largest automated warehouse for online grocery in the world” when running at full capacity, processed more than 20,000 orders last week, just 14 weeks after opening.
Since last looking at the stock in July — and voicing my concern on its rapidly-approaching-ridiculous valuation based on conventional metrics — it had fallen roughly 17% before today. Clearly, the positive reaction to today’s news will address this somewhat. Nevertheless, I remain wary.
With regard to its licencing deals, the company remained fairly tight-lipped, merely stating that it was “on track to deliver a significant number of new CFCs” for its partners in the years ahead. If I were a holder, I can’t help but think I’d want a bit more information, particularly as so much of the support surrounding the share price rests on these deals.
The fact that CEO Tim Steiner recently relinquished almost 10 million shares for a sum of over £100m is also something of a red flag in my book. Although management disposes of stock for a wide variety of reasons, a sale of this magnitude suggests that even he thinks Ocado’s share price may have peaked for now. In addition to this, the fact that only 2.5% of Ocado’s stock is now being borrowed and sold implies that the days of short sellers running to the hills are very much over.
All this isn’t necessarily problematic if Ocado takes up only a very modest proportion of your portfolio, if you are sufficiently diversified elsewhere and have time on your side.
However, even if it does deliver on its commitment to change the grocery retail landscape, I still think there are simply far less speculative stocks offering greater value (not to mention seemingly secure dividend streams) elsewhere in the market’s top tier.