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Stock Deconstruction

Ocado share price: the UK's best tech stock?

Since lockdown was announced on 23 March, Ocado's [OCDO] share price has soared over 55%. Now the Telegraph has commented that Ocado’s share price could be ‘growing faster than Amazon’. That’s a big statement. But with its proposition meeting both consumer and business demands, it should be a tech stock on any trader’s watch list.

The coronavirus outbreak has obviously helped the stock. With more people staying indoors, Ocado saw a 40% surge in sales at the start of March which has fuelled recent gains. Yet, even before the outbreak, the stock was a strong performer with investors buying into Ocado’s robotic warehouse technology for large overseas supermarkets.

In 2019, Ocado’s share price was one of the best performers on the FTSE 100, gaining 44.3%. That pace has continued into 2020, with the stock up 72% so far, outpacing Amazon’s [AMZN] 29% growth.

 

 

 

Is Ocado really a tech stock?

Investors treat Ocado as a tech company, rather than a grocer. Take its losses last year. These quadrupled to come in at £214 million, well ahead of analyst expectations. Despite this, Ocado's share price has continued to be a strong performer. This kind of growth is more akin to technology companies where the share price gains as investors bet on future profitability.

Ocado's management expects these losses to increase, with £600 million spent improving logistics and building robotic distribution warehouses for overseas clients, including Sobeys in Toronto. In the long-term, the investment could be worth it. Ocado’s UK solutions business, which services Wm Morrisons, saw an EBITA margin of 14% in 2019 - 7 times that of the company’s grocery business, according to the FT. If this success can be replicated overseas, then more profits could come in.

£600million

Amount spent by Ocado on improving logistics

  

Yet it's worth remembering that Ocado's distribution centres aren't exactly mass-produced goods. That could put a ceiling on exactly how much Ocado can make from the technology side of its business. Luckily the shift to online food shopping looks to be accelerating.

 

Increased consumer demand

Ocado saw a 32.5% rise in sales over the 12 weeks to 17 May compared to the same time last year, according to data from Kanter. In total, shoppers spent £487 million at Ocado. The online grocer's market share is now at 1.6%, having started the year at 1.3%.

32.5%

Ocado's rise in sales over the 12 weeks to 17 May

  

Fraser McKevitt, head of retail and consumer insight at Kantar points out that a pre-lockdown rush to stock up and government advice urging people to stay at home has resulted in the "fastest growth in take-home grocery sales for over 25 years."

And with many office workers stuck at home for the foreseeable future, take-home sales for grocers will be up 12% over the course of 2020. Online shopping now accounts for 11.5% of total grocery shopping in the UK.

"...the crisis has certainly accelerated the move towards online. The grocers have attracted a new group of customers, in particular older demographics, and we expect some of them may continue using online services and enjoying the convenience that home delivery provides,” said McKevitt.

“The grocers have attracted a new group of customers, in particular older demographics, and we expect some of them may continue using online services and enjoying the convenience that home delivery provides” - Fraser McKevitt, head of retail & consumer insight at Kantar

 

Time to buy Ocado?

In the UK, 32% of shoppers already buy fresh food online, according to research from Amcor. While Nielson predicts that globally 70% of customers will do their food shopping online by 2024. Both sets of research were conducted before the coronavirus outbreak.

If the outbreak really does change consumer shopping habits forever, Ocado will benefit on two fronts: its UK delivery service and its distribution technology for global clients. Now could be the time for investors to add this UK tech stock to their baskets.

 

Market Cap£15.855bn
Operating Margin (TTM)-5.18%
EPS (TTM)-29.40
Quarterly Revenue Growth (YoY)8.80%

Ocado share price vitals, Yahoo Finance, 1 June 2020

Disclaimer Past performance is not a reliable indicator of future results.

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The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although we are not specifically prevented from dealing before providing this material, we do not seek to take advantage of the material prior to its dissemination.

CMC Markets does not endorse or offer opinion on the trading strategies used by the author. Their trading strategies do not guarantee any return and CMC Markets shall not be held responsible for any loss that you may incur, either directly or indirectly, arising from any investment based on any information contained herein.

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