Is Ocado about to bounce back?

Its shares have drifted lower after a stunning rally earlier this year, but they're up again after this third-quarter update, reports Graeme Evans. Here's why.

Having been propelled into the FTSE 100 Index on excitement over its intellectual property, it was back to the bread and butter of UK groceries when Ocado updated investors on recent trading today.

There was just one sentence from chief executive Tim Steiner to remind us that Ocado is also working on plans to "change the way the world shops". This is being achieved through the roll out of its "unique technology" at a significant number of Customer Fulfilment Centres around the world.

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The biggest of these contracts is with Kroger, the second largest grocer in the United States. Other deals struck since November have included warehouse and licensing agreements with France's Groupe Casino and Canada's Sobey.

These agreements have led some in the City to describe Ocado as the Microsoft of Retail, with the potential to become the standard platform for retail logistics across all sectors, not just groceries. They are also why shares rocketed as high as 1,150p at the end of July, compared with 239p less than a year earlier.

The stock has fallen back a little since then, partly in the wake of share sales by directors including Steiner, who set up the business with two former Goldman Sachs colleagues in 2000.

The company is now worth more than £6 billion - enough for a place in the FTSE 100 Index and putting more established retailers in the shade. The promotion was achieved subsequent to annual figures in February showing only a £1 million profit and broadly flat underlying earnings of £86 million.

As a result, Ocado has been trading on a spectacular price earnings multiple of more than 4,000 times. The scale of that figure puts today's update on UK grocery trading  into context, with Ocado reporting 11.5% growth in revenues to £348.6 million for the 13 weeks to September 2.

Source: interactive investor   Past performance is not a guide to future performance

This was in line with guidance for the year, although analysts at Barclays had been looking for a rise of 12.5% prior to today's statement.

Encouragingly, Steiner reported a good performance from the company's third and fourth robotic warehouses at Andover and Erith, the latter opening this summer on time and to budget.

At full capacity, Ocado said the Erith facility will be the largest automated warehouse for online groceries in the world. Steiner said:

"Together, Andover and Erith provide new opportunities for growth in our UK retail business while showcasing the scalability, adaptability and efficiency of our platform."

The update was enough to push Ocado shares back towards the £10 mark, with the stock up 4% at 950.8p. Analysts at Peel Hunt recently reported a price target of £17, based on expectations for Ocado Solutions to generate as much as £8.3 billion in revenues by 2028.

To get there, the broker believes that Ocado will have to forget about exclusive contracts and instead focus on becoming an open industry standard in the same way as Microsoft’s Windows operating system.

Ocado shares will clearly never be cheap and it will be years before the company is making big money. But Amazon and other tech leaders have sustained ridiculous valuations for years and there's no reason to believe Ocado cannot do the same.