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Ocado’s [OCDO] share price skyrockets on “Microsoft of retail” transformation

The culmination of a trio of forces are behind Ocado’s [OCDO] 73% share price hike this year, which when compared to the 7.7% gain from the wider FTSE 100, and the online retail industry’s 8.4% return, is a good sign that the company’s growth strategy is working.    

Since its IPO in 2010, the company’s shares have been growing steadily to reach a market value of $9.5bn. The stock currently trades 30% above its 50-day moving average, with a set of variables having fallen into place in 2019 which triggered its meteoric growth.Ocado 1-year share price performance, CMC Markets, as at 1 April 2019

 

It began with a fire burning down one of Ocado’s state of the art automated warehouses in Andover – worth £45m – on 5 February. The fire caused the company to warn of a fall in sales in the next quarter, sending its shares down 14%. This was despite the company having recorded a 12.3% increase in revenue to £1.4bn in the 52 weeks ending 2 December 2018, that very same day.

While the online grocer did post a 20.7% earnings drop to £59.5m during that period, the dent was a reflection of the increase in spending to transform the business into a technology firm. 

CEO Tim Steiner – a former Goldman Sachs bond trader – had described the annual results as the company’s “18-year overnight success”, as he explained his plan to pursue the building of operating systems for retail businesses through its main offering, the Ocado Smart Platform. 

 

The turnaround begins 

But just three weeks later, this transformation came to fruition in a deal to spin off Ocado’s retail business into a £1.5bn joint venture with Marks and Spencer [MKS], forgoing its supply deal with Waitrose [JLH] that’s been implemented since the online grocer’s inception. 

£1.5bn

Value of Ocado's deal with Marks and Spencer

The £750m joint venture with M&S came at an opportune time. It not only settled investors fears around falling sales as a result of the fire, but also built on existing momentum: Ocado had already signed deals to supply a website-to-doorstep ecommerce service with the UK’s Morrison’s [MRW], France’s Casino [CO] and Kroger [KR] in the US; with the latter agreeing to 20 warehouses, or ‘Customer Fulfilment Centres (CFC)’.  

The market has since turned bullish on the online grocer’s tech focussed strategy, with James Lockyer, analyst at Peel Hunt, going as far as to suggest that Ocado could become the “Microsoft of retail”. 

 

Technology transformation  

And the gains have only continued: the food delivery company led the FTSE 100 when it announced its first quarter earnings on 19 March that showed resilient sales growth, despite the warehouse fire cutting UK delivery capacity by 10%. 

Ocado brought in £404m in revenue during the 13 weeks to 3 March, with the fire at its Andover distribution centre impacting sales by just 1.2%.

 

Market cap£9.45bn
Profit margin-2.81%
EPS (TTM)-6.90
Quarterly revenue growth (YoY)7.90%

Ocado stock vitals, Yahoo finance, as at 1 April 2019

 

Meanwhile, Ocado’s cutting edge technology service is catching the eye of retailers everywhere, with 25 CFCs set to be built as a result of existing partnerships, with as many as 30 more in the pipeline. 

Australia’s Coles [COL] supermarket most recently became its fifth international partnership deal in the last 18 months.

 

Analysts' verdict

Peel Hunt have given Ocado shares a “buy” rating, saying the news further solidified the company’s long-term prospects and provided extra reassurance that it remained on track.

Société Générale disagreed, saying that it was overvalued and reiterated a “sell” rating. The firm put a value on each new CFC licensed from Ocado at just 15p a share, going on to say, “at current share price levels, we calculate that the market is factoring in circa 30 additional CFCs over and above the 25 already contracted for”. 

“At current share price levels, we calculate that the market is factoring in circa 30 additional CFCs over and above the 25 already contracted for” - Société Générale

Whether that is indeed the case is not clear and will ultimately come down to the execution of the recently announced deals. 

For the moment though, Ocado’s share price is on an upward course. At the time of writing, the stock had hit a new all-time-high of 1370p on 29 March, bringing its two-year performance to a 474% gain, which begs the age-old question: when will it peak?

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