Ocado’s yo-yoing stock swings up again: Will critics ‘put away knives they’ve been sharpening’?
A strong set of results this morning sent Ocado’s stock up 18 per cent, a day after a downgrade from leading broker Bernstein sent it down 10 per cent yesterday.
In its interim results for the 26 weeks to 2 June 2024, the company reported revenue of £1.5bn, up by 12.6 per cent year on year.
The company is admittedly still loss-making, but chief executive Tim Steiner said there was a “clear road-map” to profit by 2026.
The retail division—the biggest of the group’s three divisions with revenue of £1.3bn—reported growth of 11 per cent, while its tech arm recorded growth of 22 per cent. Ocado logistics reported growth of six per cent.
But after a series of false starts, will this be enough to convince the firm’s long-suffering investors to stay?
Will it be enough for investors?
Investors have become increasingly cautious about Ocado’s outlook.
Leading broker Bernstein, one of the company’s last supporters in the City, downgraded the stock to “underperform” on Monday after seemingly losing patience with the business.
“Sustained improvements are the only ways to make the critics put away the knives they’ve been sharpening for some time,” Dan Coatsworth, investment analyst at AJ Bell said.
“Given its business model is focused primarily on the technology side of things, not delivering food to people’s homes, Ocado cannot sit comfortably until it wins more contracts and builds scale,” he continued.
RBC analyst Wassachon Udomsilpa described the results as “reassuring”, given the last three months.
He expressed concern over its “ambitious” mid-term targets, but described Ocado’s tech as “world-leading.”
“With downside risk to group estimates and a lower probability of further game-changing international deals, we remain cautious on Ocado”, Udomsilpa said. RBC rated the stock as “underperform”.
Why is Ocado having issues?
Ocado looked set for a winning few years during the pandemic as consumers made an overwhelming shift to online shopping, but a lack of capacity meant that it failed to capitalise on this trend.
Other grocers were able to boost capacity by using their stores as fulfilment centres, taking a larger share of the online shopping space.
Ocado’s golden opportunity has now passed, as demand for online shopping has weakened since the pandemic.
Partnerships, too, which once looked so promising for Ocado, have failed to live up to expectations.
Partnerships have been paused – like Kroger and Sobey’s – or delayed (Coles). Ocado is also embroiled in a legal dispute with Marks and Spencer – which owns half of Ocado.com – over payments related to Ocado missing contractual targets.
“Ocado’s biggest challenge is being seen as an expensive online retailer… to attract more customers beyond the high-income segment, Ocado needs to offer better value, introduce cheaper and more flexible delivery options, and expand multi-buy deals” Udomsilpa said.
“They are not advertising in the right channels, missing the mass market beyond their current wealthy customers,” he added.
Ocado has shifted its focus in the last few years to providing B2B robotics and automation services, with some suggesting it could spin out the retail business to focus solely on tech.
However, the company has also been criticised for its slow progress in signing up new tech partners and for its grocery logistics platform, AJ Bell said.
M&S joint venture
Ocado and retail giant Marks signed a 50:50 deal nearly five years ago for Ocado to sell the retailer’s food via its online store. Marks paid an upfront sum of over £560m.
It is due to pay an additional £190.7m this August, based on certain performance targets being met, but Marks is withholding the final payment over claims Ocado has under-delivered.
This disagreement has escalated, with Ocado warning of potential legal action if its partner does not hand over the final payment.
“M&S and Ocado have different ideas for their joint venture. M&S wants to push its products online, while Ocado aims to create a platform for other retailers worldwide,” Owra Mohammed, an analyst at Third Bridge, said.
He suggested “either a complete spin-off or M&S buying the entire business”, both of which could “drive significant growth”.
However, AJ Bell analyst Dan Coatsworth suggest this relationship “might not be a complete disaster”.
“Revenue is picking up and the venture can call itself the UK’s fastest growing food retailer,” he said. “More focus is going into price, making sure core products are more affordable to a wider group of shoppers.”
Peel Hunt analysts rated the stock a ‘Buy’ this morning.