Ocado: does lockdown shopping boom mark turning point?

The pandemic has generated a massive boost to first-half results, reports our head of markets.

The market adage goes that it is often better to travel than to arrive, and Ocado (LSE:OCDO) has certainly not finished its journey.

Perhaps in normal circumstances for a well-established company, the lack of signs for immediate profitability, no prospect of a dividend and a recent £1 billion fundraising could be viewed as potential red flags. 

Capital expenditure for the 26 weeks ended 31 May 2020 increased to £219 million versus £112 million in the previous period, with the total expected to reach £600 million for the full year. The outcome of the company’s current expansion is another net loss for the period of £41 million, although this marks a step in the right direction from the previous figure of £147 million.

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However, this is not how Ocado is viewed. Sitting somewhere between a traditional food retailer and a high technology innovator gives the company two bites at the cherry.

On the one hand, the online grocery business has been a clear beneficiary of the pandemic, seeing retail revenues rise by 27% over the period. The current debate as to whether this unique few months marks a turning point, with the shift towards online grocery shopping being here to stay, will soon become evident. 

Meanwhile, the enforced growth of grocery shopping online globally has also been of benefit to Ocado through its Solutions business and, in particular, through its overseas partners. Fees from its international solutions partners have risen by 58% in this short period of time, and this revenue rise could yet prove to be the thin end of the wedge in the longer-term.

In addition, to be reinvesting in the business apace without an immediate eye on profit can be a winning strategy, as previously evidenced in the exponential growth of Amazon (NASDAQ:AMZN). As Ocado’s offering continues to set it apart from potential new entrants, both in terms of scale and technological innovation, barriers to entry remain high which leaves Ocado with the prospect of signing up further large international partners.

The conversion of great expectations into reality is starting to appear for Ocado, although perhaps not with the speed which the share price suggests. Without question, the previously transformational deal with Kroger of the US was a major win. Nor did Ocado rest on its laurels, with further sign ups in Australia and Japan, and with Canada and France now live. Meanwhile, the joint venture with Marks & Spencer (LSE:MKS) remains on track for its September launch with an offering which has all the hallmarks of a more enticing offer than is currently the case.

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As such, the potential for the business is huge and loyal investors have been amply rewarded. Over the last year, the shares have risen by 78%, as compared to a decline of 18% for the wider FTSE 100 index. Over the last three years, the shares have had a stratospheric ascent of over 620%. 

Inevitably, this performance heightens the bar for expectations and, at some point, Ocado will need to shake off its status as a “jam tomorrow” stock. In the meantime, the market consensus of the shares as a ‘hold’ is perhaps reflective that the shares remain up with events for now, until the next stage of Ocado’s transformation becomes evident.