There has been an awful lot of hype about Ocado Group (LSE: OCDO). Some have even claimed it could be the UK’s answer to Amazon or Microsoft, a technology company delivering long-term growth to shareholders from its global operations.
Global tech play
Investors who bought into the story have been rewarded so far, with the stock rising an incredible 400% in the past three years. That makes it one of the most spectacular performers in the FTSE 100 with a market cap now closing in on £10bn. However, it may have gone too fast, too soon, I believe.
Investors are pinning their hopes on the success of its platform business, which provides off-the-shelf online groceries technology for global retailers, and has struck an impressive series of overseas tie-ups including a blockbuster deal with US chain Kroger. However, today’s Q3 trading statement focused on Ocado Retail, the £750m joint venture with Marks & Spencer Group.
This showed retail revenue growth up 11.4% to £386.3m, in line with guidance for the remainder of the year, with 12.1% growth in average orders per week to 314,000, as more slots became available. The average order size actually fell 0.8% to £105.42, which many investors will no doubt find disappointing, although today’s statement defended this by saying it reflects “slightly greater frequency of purchase”.
Ocado’s robotic warehouses have suffered a couple of fires this year, a serious one in Andover sparked by an electrical fault, and a smaller one at its customer fulfilment centre in Erith, Southeast London, last month. The group seems to have quickly recovered from the latter, and is already building additional capacity.
Delivering the goods
Ocado Retail’s CEO Melanie Smith said the first set of results from the M&S joint-venture shows its resilience and momentum, as it prepares to launch the full M&S food range online on Ocado.com. Unfortunately we will have to wait a while to gauge its success, as the launch date has been set for September 2020.
M&S desperately needs to back a winner, having just dropped out of the FTSE 100 for the first time ever. This could be the fallen high street star’s best way of clawing its way back.
The big worry is that Ocado’s share price growth has outpaced the opportunity here. It currently trades at a hefty price-to-sales ratio of 5.9, and a price-to-book ratio of a massive 16.9. Forecast revenues and earnings growth look flat for the next couple of years. Basically, investors are being offered jam tomorrow, as well as a wide range of other food items, when those juicy foreign tie-ups get up and running.
Kroger started work on the first of 20 automated customer fulfilment centres in June, using Ocado’s “transformative e-commerce, fulfilment and logistics technology”. If chairman Tim Steiner is correct, it is aiming at a prize worth between £3.5bn and £17.5bn for the group, but its solutions business has only generated revenue of £135m over the last year.
This year it is on course to make a loss of around £99m, followed by another £58m next year, which will be its fourth loss-making year in a row. Many believe this is now a speculative investment. I wish Ocado luck, but it looks a little too risky for me.
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Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has no position 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.