FTSE 100 stock Ocado (LSE: OCDO) has had an incredible run over the last three years, rising from around 245p to just under 1,300p. That means a £2,000 investment 36 months ago would now be worth over £10,500.
The main reason the stock has surged so spectacularly is that investors now see the company as less of an online grocer and more of a technology specialist, as it is now focused on providing warehouse automation solutions through its technology arm, Ocado Solutions. The group’s current £9bn market cap suggests the market believes Ocado has huge growth potential.
Is Ocado still an attractive investment proposition after a 430% gain in three years? Let’s take a look at the investment case.
Automation is a big theme
Let me start by saying that I am very bullish on automation as an investment theme. Over the next decade, I expect companies across a wide variety of industries to automate basic tasks, and for this reason, I have a small position in the ROBO Global Robotics & Automation ETF, which invests in global companies that are driving transformative innovations in robotics, automation, and artificial intelligence.
Turning to Ocado, I think its technology offering, the Ocado Smart Platform (OSP), certainly looks interesting. An end-to-end suite of solutions for operating online grocery businesses, OSP helps other retailers increase productivity, enhance flexibility, and generate higher profit margins. By partnering with Ocado Solutions, retailers can develop a sustainable, scalable, and profitable online grocery business, cost-effectively and with minimal risk.
Thanks to the group’s first-mover advantage, Ocado has already signed a number of key deals with major supermarket groups around the world, including Kroger in the US, Groupe Casino in France, and most recently, Japanese supermarket giant Aeon. Clearly, the group has momentum right now.
No profits = risk
That said, my issue with Ocado, from an investment point of view, is that its shift towards automation solutions has wiped out its profits. In FY2018, the group generated a net loss of £45m. And for FY2019, analysts forecast a net loss of £140m. As my colleague Alan Oscroft recently pointed out, investors should not expect profits to return for at least the next couple of years.
In my view, this lack of profits adds risk to the investment case. Without profits, it’s much harder to put an accurate valuation on a company. And in a market downturn, highly-rated companies with no profits can be hit hard.
Of course, unprofitable companies can still turn out to be amazing investments. Just look at Amazon – it was unprofitable for years. Those who invested early and stayed invested would have done very well.
However, after being burnt by unprofitable companies in the past, one of my key rules these days is that I only invest in companies that are profitable. For this reason, I won’t be investing in Ocado right now. I will, however, be monitoring the company’s growth closely, with a view to investing in the future.
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Edward Sheldon has a position in the ROBO Global Robotics & Automation ETF. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. 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.