Online grocer Ocado's [OCDO] share price has delivered better returns than traditional supermarket stocks this year. Since January, the stock has gained 79.91% while Tesco, Morrisons and Sainsbury's are all down on the year (through 11 September’s close).
Ocado’s share price has benefitted as more people do their weekly food shop online due to the coronavirus pandemic. However, investment in building hi-tech fulfilment centres for supermarkets all over the world has come at a price, with the company racking up losses to outweigh profits from the online delivery business.
So, what should investors expect from Ocado’s share price following Q3 earnings results?
When is Ocado announcing Q3 earnings?
Why should investors care about Ocado's share price?
Trend towards online grocery shopping
Ocado’s share price has been a standout performer this year as more people have shopped online during the pandemic. According to Reuters, UK online food sales increased an impressive 11.3% between March and May. A poll conducted by Waitrose suggested that more than three-quarters of the UK population now do grocery shopping online, up from 61% last year.
"The pandemic has digitised whole new sections of the population," said Clive Black, retail analyst at Shore Capital. "Online is here to stay."
During lockdown, this shift meant Ocado’s share price continued to rise, while the company saw a 40% growth in sales. Whether the momentum has continued into Q3 will be something investors need to watch in the earnings results.
Growth of Ocado's sales during lockdown
Partnership with M&S
Ocado's share price has also benefitted from its joint venture with M&S, which has had a strong start. So strong, in fact, that the first day of the partnership was marred by a small number of cancellations due to the “surge in demand”. Unsurprisingly, this led to some unhappy customers venting on social media.
"The M&S launch has been incredibly popular. We have seen a surge in demand for M&S products in the run-up to launch which has impacted a very small number of orders today. The vast majority of customers are unaffected and will be delivered as normal,” said a spokesperson for Ocado.
“The M&S launch has been incredibly popular. We have seen a surge in demand for M&S products in the run-up to launch which has impacted a very small number of orders today. The vast majority of customers are unaffected and will be delivered as normal” - Ocado spokesperson
With Percy Pig-branded Ocado delivery trucks now on the road, this is a big change for both retailers. For Ocado, it marks the end of a two-decade-long partnership with Waitrose, while for M&S, the partnership sees its food being sold online for the first time — an important update given the shift in consumer behaviour.
Any solid details on how strong the ‘surge’ has really been will be closely watched in the results, and will no doubt have an impact on Ocado’s share price.
Mounting tech debt
Ocado’s half-year results saw group EBITA come in at £19.8m, down 35% from the £30.7m seen in the same period last year. Weighing on earnings was increased investment in Ocado's International Solutions business, which builds high-tech warehouses for other supermarkets. These outgoings were also reflected in Ocado delivering a substantial £40.6m loss before tax for the half-year 2020.
While that's better than the £147m in losses seen in the first half of 2019, it reflects the sheer expense of being both a retailer and a technology company. Investors will be looking at whether Ocado can narrow these losses in the third quarter.
|Operating Margin (TTM)||0.12%|
|Quarterly Revenue Growth (YoY)||23.2%|
Ocado share price vitals, Yahoo Finance, 14 September 2020
What do the analysts think?
Considering the losses it has racked up, the danger for investors is that Ocado’s share price is now overvalued and doesn't reflect the true worth of the business.
Among the analysts, Ocado’s share price carries a 1,770p target on the Financial Times, which would see a serious 21.9% downside on its price as of 11 September’s close. Of the 18 analysts offering recommendations, there are 5 Buy ratings, but also 6 Hold and 4 Underperform ratings.
However, Ocado seems bullish on the future of online grocery shopping, reckoning its market share could double in the near future.
"We'll see another doubling of the market in the next few years," Ocado CEO Tim Steiner told reporters. "You'll then see a continued channel shift to significantly greater market share and ultimately to be the mainstream market share."