Shares in online grocer Ocado Group (LSE: OCDO) climbed 6% on Tuesday after the firm reported a 10% rise in revenue for the first half of 2019. The gain extends a run that’s seen the FTSE 100 firm’s share price double since May 2018.
So far, so good. But this loss-making company is now valued at £8.8bn. Are the shares still worth buying in hope of Amazon-like long-term growth? Or is it time to start taking profits on this stock?
Sales up, losses up
Tuesday’s results were dominated by the impact of the fire which destroyed Ocado’s Andover warehouse earlier this year. The firm booked almost £100m of net costs relating to this during the first half, although these costs should be recovered through insurance payouts.
Despite the impact of the blaze, adjusted revenue for the group rose by 10.5% to £874m during the period. Revenue from the solutions business, which sells Ocado technology to other retailers, climbed 20% to £71m, while retail sales were 10% higher, at £803m.
However, this progress wasn’t enough to stop the firm’s underlying pre-tax loss rising from £12.9m to £43m.
Same old problems
The company is due to receive a cash payment of £563m shortly as its joint venture with Marks & Spencer gets underway. However, spending commitments for the current year total £350m, as Ocado pumps cash into the new robotic warehouses it’s building for various customers.
A second concern for me is that distribution and administration costs continue to rise more quickly than either sales or gross profit. These costs rose by 21% to £327m during the half year, swallowing up 37% of sales revenue.
These numbers highlight a problem I’ve discussed before. From what I can see, this business doesn’t have the ability to scale like a proper technology business. New warehouses require major upfront investment. And more deliveries require more vans and more drivers.
It’s not clear to me when this business might become profitable.
An exciting long-term picture
Ocado bulls will probably say that I’m not seeing the long-term opportunity. Perhaps that’s true. In a presentation to analysts this morning, chief executive Tim Steiner said that the company’s existing partnerships with other retailers have the potential to provide between £1bn and £3bn in fee revenue.
Mr Steiner believes that the wider grocery market offers a “£3.5bn – £17.5bn fee opportunity”.
Perhaps. But the solutions business has only generated revenue of £135m over the last 12 months and has yet to become profitable. In the meantime, the firm’s £8.8bn market cap means that this loss-making business is valued at more than five times sales. Even profitable Amazon is only valued at four times sales.
Ocado’s business is expected to continue losing money for some time yet. But its technology is impressive. If you share Mr Steiner’s vision of a “lights-off future” where giant automated warehouses and indoor farms dispatch fresh food to consumers, then sit tight.
However, I think the firm’s current valuation already prices in a lot of future growth. In my view, the sensible thing to do at this point would be to sell enough shares to cover your costs. Then you could sit back and enjoy the ride without fear of losses.
According to one leading industry firm, the 5G boom could create a global industry worth US $12.3 TRILLION out of thin air…
And if you click here, we’ll show you something that could be key to unlocking 5G’s full potential...
It’s just ONE innovation from a little-known US company that has quietly spent years preparing for this exact moment…
But you need to get in before the crowd catches onto this ‘sleeping giant’.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Roland Head has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Amazon. 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.