In just a few weeks, Ocado (LSE: OCDO) has seen its share price jump by almost half and is up 45% since last month.
That may be scant comfort to long-term shareholders, as the share is still down 86% over a five-year timeframe. Still, could this be the start of a comeback for what has sometimes been seen as one of the more promising tech companies in the London market?
Promising signs of business improvement
Ocado has been a cash pit for years, hungrily burning through money. That is one reason for the dramatic long-term fall in the Ocado share price.
Lately though, investors have been cheered by some promising pieces of news.
For starters, first-half revenues grew 13% year on year. The company even moved deep into the black on a statutory basis for the first half, recording a profit of £612m on that basis. That is less exciting than it sounds though, as it was driven by adjustments of £742m.
What about cash flows? At £13m, free cash flows for the first half were still modest – but at least they were positive. Underlying cash flow was still negative, at £108m. Still negative, but sharply better than the same period last year.
What has really excited investors is the bigger picture for cash flow. The company says its “core priority” is to turn cash flow positive next year and “full year cash flow positive” the following year.
Syntax might not be Ocado’s forte but neither is free cash flow generation, so the prospect of light at the end of a long tunnel has animated the City — and pushed the Ocado share price up dramatically.
Will Ocado deliver on its targets?
Ocado’s expectation setting for positive free cash flow is certainly welcome. The cash spent already on building its distribution centres and other infrastructure worldwide has been vast.
But what matters now is whether it can actually deliver on those targets. The company has net debt north of £1bn and has repeatedly diluted shareholders in the past to raise more funds.
Its retail operations have generally performed well in recent years. The big drain has been scaling up the technology and physical infrastructure required to support its scaling of outsourced digital sales and fulfilment operations for retailers.
Ocado’s technology business now has 13 grocery retailers as customers, suggesting its solution is widely accepted. But getting to that point has been expensive.
I’m not ready to invest
The company has destroyed huge amounts of shareholder value over the years. Its ambitious plans have long grabbed attention, while its cash burn has raised questions about the viability of its business model over the long term.
If it really does turn free cash flow positive on a sustainable basis, I think that could be excellent news for the Ocado share price. In years to come, it may soar — if the goal is met.
But it remains to be seen whether Ocado can indeed do that. Building and maintaining its distribution network (much of it in locations matched to specific customer needs) has been costly. I expect that to remain the case.
I therefore prefer to wait and see Ocado hit its cash flow target before considering investing, even if that means the share price may be higher then than it is now.
