The City Is Turning Its Back On Ocado Group PLC

The City is turning its back on Ocado Group PLC (LON: OCDO).

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Ocado (LSE: OCDO) has been one of the market’s worst performers this year, falling more than 30% to date. The company is rapidly losing friends. Indeed, many investors and analysts alike are now starting to openly question the company’s business model and valuation. 

And it’s easy to see why. Ocado trades at a sky-high valuation of 161 times forward earnings, which makes the company one of the most expensive stocks listed in London. Nevertheless, investors have been willing to pay a premium to get their hands on Ocado’s shares, thanks to the company’s unique business model. 

However, some of the City most highly rated analysts have recently started to question the sustainability and uniqueness of Ocado’s business model.

Low barriers to entryOcado

A key part of Ocado’s business model is the use of technology to process customer orders. The company has been trying to license and sell its unique customer order fulfilment technology for some time. Unfortunately, according to analysts’ only one piece of technology, a robot arm, is uniquely patented to Ocado. 

What’s more, this robot arm is part of a machine which is manufactured by an outside provider, Swiss engineer Swisslog. After taking this into account, it would appear as if Ocado’s technology is not really very unique at all. 

Long time loser

City analysts have also started to call into question the quality of Ocado’s earnings. For example, according to one analyst after excluding accounting benefits from joint ventures, Ocado has not been profitable on a pre-tax basis at any point in its life.

Additionally, Ocado is unlikely to report a pre-tax profit, or positive cash flow for the next four years, after excluding accounting benefits. 

Room to grow

Still, these dismal forecasts are at odds with more optimistic brokers in the City. Indeed, some analysts are expecting international technology licensing deals before the end of the year.

Further, the company’s new warehouse model, promises to be quicker and much less costly to build, which should reduce costs and increase efficiency. Successful construction will also allow the grocer to accelerate its expansion plans around the country, boosting market share, revenue and ultimately profitability. 

That being said, there have been some questions about how Ocado will fund its expansion. Rumours have suggested a rights issue is on the cards, something the company has so far managed to avoid. 

But there’s no doubt that Ocado remains a risky bet. As the company trades at 161 times forward earnings there is little room for error. That’s trouble with growth companies like Ocado, investors are prepared to pay a premium for the shares.

But there are other opportunities out there. The key, when searching for growth stocks, is looking under the radar. You want to get on board while the company is still an unknown quantity.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Passive income text with pin graph chart on business table
Investing Articles

Yields of up to 7%! I’d consider boosting my income with these FTSE dividend stocks

The London market has some decent-looking dividend stocks right now, and I’m tempted by these two for growing income streams.

Read more »

Young mixed-race couple sat on the beach looking out over the sea
Investing Articles

I’d put £20K in an ISA now to target a £1,900 monthly second income in future!

Christopher Ruane shares why he thinks a long-term approach to investing and careful selection of shares could help him build…

Read more »

Mature couple at the beach
Investing Articles

6 stocks that Fools have been buying!

Our Foolish freelancers are putting their money where their mouths are and buying these stocks in recent weeks.

Read more »

Black woman using loudspeaker to be heard
Investing Articles

I was right about the Barclays share price! Here’s what I think happens next

Jon Smith explains why he still feels the Barclays share price is undervalued and flags up why updates on its…

Read more »

Investing Articles

Where I’d start investing £8,000 in April 2024

Writer Ben McPoland highlights two areas of the stock market that he would target if he were to start investing…

Read more »

View of Tower Bridge in Autumn
Investing Articles

Ahead of the ISA deadline, here are 3 FTSE 100 stocks I’d consider

Jon Smith notes down some FTSE 100 stocks in sectors ranging from property to retail that he thinks could offer…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

Why I think Rolls-Royce shares will pay a dividend in 2024

Stephen Wright thinks Rolls-Royce shares are about to pay a dividend again. But he isn’t convinced this is something investors…

Read more »

Investing Articles

1 of the best UK shares to consider buying in April

Higher gold prices and a falling share price have put this FTSE 250 stock on Stephen Wright's list of UK…

Read more »