Is Ocado [OCDO] a retailer or a technology solutions provider? The online grocery firm doesn’t trade like a retailer, and investors don’t treat it as such, given that it has yet to make a profit – although Ocado’s share price has certainly been on an upward trajectory over the past few years.
Split business model fuels growth
Ocado’s growth has been fuelled by its split business model, with retail operations and software. Last year’s unveiling of a tie-up with Marks & Spencer [MKS] was a boost, while Ocado Solutions, which licenses proprietary software and builds robotic warehouse infrastructure, has also been gaining new partnerships, including deals with French retailer Groupe Casino [CO], Kroger [KR] in the US, Asian retailer Aeon [AEON] and Australia’s Coles [COL]. Ocado get upfront payments as well as recurring fees, once the delivery operations get underway.
Meteoric Ocado share price hike
Despite not managing to forge a profit, the Ocado share price certainly delivered in 2019. From a low of 873.80p on 7 February, its shares soared some 64% to 1,435p on 10 April. Since then, Ocado’s share price has slipped, falling at its lowest point to under 1,100p.
The company also hadn’t had the best of starts to 2020, sliding from above 1,300p in mid-January to below 1,080 just last week. However, the current coronavirus crisis is undoubtedly fuelling demand for groceries and other products – notably toilet rolls for example – as people panic-buy with the threat of lockdown and potential disruption to supply chains. This is benefiting supermarkets, and in particular Ocado, which has a major stake in distribution channels, supplying Morrisons in the UK for example. Since 12 March, Ocado's share price has leapt from 1,077p, to 1,344p on 17 March.
Mixed coronavirus impact
There’s little doubt that people will be spending a lot more time indoors over the next weeks and months, and that should lead to an increase in spending on food and drink. However, supermarkets do rely on long supply chains, and any disruption here could limit the availability of some products – in fact it looks like this is already happening. A potential recession, as a consequence of the coronavirus and businesses struggling, would also not be the best of news for retailers.
M&S joint venture a boost for Q4 revenue
It’s had its problems over the last couple of years, including fires at two of its distribution warehouses, which hit output early last year. Last July, management put the cost of the fires at more than £100m.
However, that setback hasn’t stopped the company from ramping up its growth plans, and its joint venture with Marks & Spencer prompted retail revenue to rise by 10.8% to £429.1m at the end of the last quarter. Average orders per week also increased, from 317,000 a year ago to 350,000, a rise of 10.4%.
Last month the company said it expected to grow retail revenue for the upcoming year by 10% to 15%, despite posting a loss of £214.5m last year due to higher costs as a result of the Andover fire. So, with such optimism in-house, and assuming there are no further unexpected setbacks like the two fires – plus as a potential beneficiary of the current coronavirus crisis – is there a rosy future ahead for Ocado and its share price potential? Its first-quarter results should give us an early indication.
Disclaimer: CMC Markets is an execution-only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment security, transaction or investment strategy is suitable for any specific person. 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.