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Why I think the Ocado share price could now be a bargain despite all-time high

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Online supermarket business Ocado Group (LSE: OCDO) saw its share price rise to an all-time high of 1,368.50p on Thursday 28 March, and the inevitable question surfaced – when will it reach its ceiling?

Ocado announced a partnership with Australian retail giant Coles on Tuesday 26 March, driving the shares up 6% on the day. The Coles deal is the latest in a series of overseas partnerships announced by the company in the last 18 months.

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Just last month on the domestic front, Marks & Spencer signed up to a multi-billion pound venture alongside Ocado, as the online chain showed its willingness to engage with, as much as compete directly against, its traditional bricks-and-mortar rivals.

Overpriced?

Ocado shares have rocketed more than 147% in the last year, leading many to label it as overpriced – but much of the evidence suggests the contrary.

The group posted a drop of more than 20% in its earnings for 2018, and that trend is predicted to continue during 2018, but it is investing heavily in its innovative retail technology and increasing the number of warehouses it operates.

The warehouses, or Customer Fulfilment Centres (CFCs), is expected to be key to Ocado’s global strategy with 25 already contracted to be built as a result of existing partnerships, with as many as 30 more in the pipeline.

Ocado’s shift away from its online supermarket operations towards its technological solutions has reaped rewards so far, as investors clearly think there is plenty of room for growth in the sector.

Profits do paint their own picture, of course, and with forecasts suggesting that that is unlikely to change any time soon, there is an element of faith being placed in the international deals and sales figures being announced by Ocado.

The company has said that it expects EBTIDA in 2019 to decline due to £15-20m in operating costs involved in building CFCs and improving its tech products. .

Analysts at Societe Generale suggested earlier this week that the stock was significantly overvalued and that much will depend on the execution of the recently announced deals.

Further value

What is clear is that major retail groups are highly impressed with the Ocado Smart Platform (OSP), the company’s main technological offering, and if they can roll it out successfully as part of these international contracts then there is further value to be unlocked.

The fact of the matter remains that in its OSP Ocado has a product that provides a unique solution for supermarkets in a time when they are desperate for innovation in response to rapidly changing consumer behaviours.

While we have seen the example of tech companies heading the wrong way following major investment and limited to non-existent profitability, there are plenty of success stories from this strategy as well if it is correctly managed. The indications for me at this point suggest that is the case for Ocado!

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Neither Conor nor The Motley Fool UK hold positions in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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