ii view: is the decline in Ocado shares deserved?

Down 35% from a one-year high, factors such as the pandemic are in play. We assess prospects. 

First-half results to 30 May

• Group revenue up 21.4% to £1.3 billion
• Retail revenue up 19.8% to £1.22 billion
• Adjusted earnings up 41% to £61 million
• Loss before tax of £23.6 million, down from a loss of £40.6 million last year

Chief executive Tim Steiner said:

“We continue to build strong partnerships with our clients and win new clients, based on our twenty year experience as a technology company and a food retailer, and these partnerships are the bedrock of our business. Our partners will continue to benefit from the full suite of options available from OSP as well as high levels of innovation and problem-solving which is at the heart of Ocado's DNA. Together, we are reshaping the grocery industry to the benefit of consumers around the world.”

ii round-up:

Ocado (LSE:OCDO) operates via the two divisions of Retail and Solutions. 

Retail is the company’s own online supermarket business, now run as a 50:50 joint venture with Marks & Spencer (LSE:MKS). It delivers over 50,000 products, including big-name brands, a range of M&S and Ocado own brand products and a growing non-food selection. 

Solutions is responsible for helping other retailers with their online offerings using its Ocado Smart Platform (OSP) software and robot technology. Current retail partners include Morrisons (LSE:MRW) in the UK, Kroger in the US and Coles in Australia. 

For a round-up of these latest results, please click here.

ii view:

Analysts now broadly break the Ocado business and its prospects into three areas - its UK Retail business, the valuation of contracts around its Solutions business, and, thirdly, expectations on newly won Solutions contracts. Ocado’s share price has fallen from a one-year high above 2,900p to under 1,900p.   

For investors, expectations of a slowdown in sales for its UK retail business, as the population emerges from the pandemic, look to be feeding into the recent de-rating. The company’s technology label, given its software and robot technology, are also likely to have been in play. Market speculation about higher interest rates has in recent months pressured technology stocks, with some switching into so-called ‘value’ or more traditional stocks taking place. Ocado’s ongoing litigation battle with Norwegian robotics company AutoStore also remains a concern. 

But Ocado once estimated its addressable market for its Solutions business to be around $700 billion. A new Solutions partnership with Spain’s Auchan Retail was announced in tandem with these latest results. However, these are major commitments for such retailers. Pandemic impeded international travel is unlikely to be oiling the wheels of business deals. Around 80% of Ocado’s stock market value is considered by analysts to be attempting to value its Solutions business, the other 20% the UK Retail business. In all, while 2021 may not witness the growth of 2020, an estimated analyst fair value price of 2,194p arguably suggests potential for long-term upside. 

Positives: 

• Efficient technology based packing of customer orders
• UK capacity should grow by 40% over 2021

Negatives:

• Legal claim over patents by Norwegian robotics company AutoStore
• Doesn’t pay a dividend

The average rating of stock market analysts:

Hold