Shares in online supermarket and FTSE 100 growth stock Ocado (LSE: OCDO) were in great form again this morning as it released another encouraging update on trading.
Can the company continue this positive momentum and help new investors grow their wealth? Despite being proven wrong in the past, I’m still to be convinced.
“Unprecedented demand”
The grocery sector has, of course, been one of the few to thrive during this pandemic. It comes as no surprise then that Ocado announced today it had experienced “unprecedented demand” over recent weeks and that it was now delivering “significantly more groceries to households than ever before.”
Without doubt, today’s numbers were excellent. Revenue growth in its retail arm in Q2-to-date was a little over 40% higher on the previous year. It was also almost 30% higher than in Q1.
Although sensing that normal shopping habits had returned, the growth stock said the number of items in customers’ baskets was still high. That said, it did caution investors that the near-term outlook remained cloudy. Since no one knows how long it will take for life to return to normal, management chose to suspend its guidance on retail revenue for the current financial year.
Growth stock
Of course, Ocado is more than just an online supermarket. It’s Solutions arm is the reason many investors hold the growth stock. Through its Smart Platform, the company is able to offer infrastructure and software solutions to grocery firms around the world. Giants such as Kroger and Coles Supermarkets are already on board. So too is the UK’s fourth-biggest supermarket Morrisons.
On this front, there was more good news. Despite the pandemic, the company reported delivering its first international customer fulfillment centres (CFCs) to French firm Groupe Casino and Canadian retailer Sobeys on time. It added that it was not experiencing any material delays in terms of delivering further facilities to other customers.
So, was I wrong about Ocado?
I have no hesitation in holding my hand up and declaring that — purely from a share price perspective — my call on Ocado was wrong. It’s done very well for investors and I’m not one of them.
So, has my opinion on the company changed? Not really.
From a valuation perspective, Ocado still looks faintly ridiculous. Yes, it has market-leading technology (although it’s worth noting that its website couldn’t cope with demand in March). Yes, it has £1.2bn of cash on its balance sheet. And, yes, online grocery retailing is the future. But, with a market-cap approaching £12bn, how much of this is priced in? I’d say a lot (and then some).
Aside from the fact it’s still to make a profit, Ocado must also contend with the possibility that a free-falling global economy will have an impact on how much people are able/willing to spend on groceries going forward. In this scenario, it’s surely the German discounters Aldi and Lidl that will benefit, not new joint venture partner Marks & Spencer.
As positive as today’s update was, I certainly wouldn’t want to be caught owning the shares if everything didn’t proceed perfectly. And, as we know, it pays to expect the unexpected when investing, particularly in 2020.
Good luck to all new holders. But I think there are less risky ways to make money in the FTSE 100 right now.
