Ocado extends post-Christmas rally to 40%

After these final results, Ocado shares are racing back toward last summer's record high. Here's why.

Big annual losses failed to stop the march of online grocer Ocado (LSE:OCDO) in the FTSE 100 index today as CEO Tim Steiner insisted the company's growth story "is only just beginning".

Now worth more than £7 billion following a 30% surge for its shares so far in 2019, the grocer-turned-technology company is comfortably bigger in valuation terms than Marks & Spencer (LSE:MKS), Morrisons (LSE:MRW) and Sainsbury's (LSE:SBRY). The stock rose 3% today, even though it recorded bigger-than-expected losses of £44.9 million for the 2018 financial year.

What mattered most for many investors was the in-line performance on underlying earnings at £59.5 million, as well as continued high expectations from the roll out of its "unique technology" at a significant number of Customer Fulfilment Centres (CFC) around the world.

The biggest of these contracts has been with Kroger, the second largest grocer in the United States. Other deals struck in the past year or so have included warehouse and licensing agreements with France's Groupe Casino and Canada's Sobey.

Shareholders have also been excited by talk of a deal for M&S to use some of Ocado's logistics, although there's been no confirmation from either party.

A deal would underline the potential for Ocado to become the standard platform for logistics across all retail sectors, leading Peel Hunt to recently make comparisons as the Microsoft of Retail. Such excitement is also why shares rocketed to 1,150p at the end of July, earning the company a place in the FTSE 100 after a rise of nearly 400% in the space of a year.

The stock fell back over the second half of 2018, partly in the wake of share sales by directors including Steiner, who set up the business with two former Goldman Sachs colleagues in 2000. 

Source: TradingView       Past performance is not a guide to future performance

There also continue to be the inevitable questions about Ocado's hefty valuation multiples, given that it is many years away from making big money. That said, Amazon and other tech leaders have sustained over-the-top valuations for years and there's no reason to believe Ocado cannot do the same.

Analysts at Peel Hunt recently reported a price target of £17, based on expectations for Ocado's smart platform division to generate as much as £8.3 billion in revenues by 2028.

The figure in 2018 was up 15.8% to £123 million, which reflects the fact that sales are only recognised once a customer's first CFC is opened. Cash fees from partners, however, jumped to £200.1 million from £146.1 million. In contrast, the core Retail delivery business achieved revenues of £1.45 billion after a stellar rise of 12% on a year earlier.

Steiner said: "Creating future value now will involve us continuing to scale the business, enhancing our platform, enabling our UK retail business to take advantage of all its opportunities for growth, and innovating for the future.

"We look forward to fulfilling these opportunities with excitement and determination."

During a "transformative year", Steiner said the company had been talking to multiple retailers in a variety of markets with a view to adding more partnerships to its platform. It has increased technology headcount by 76% in the past three years, including 300 programmers hired in 2018.

Ocado has also been fulfilling customer orders for Morrisons from its state-of-the-art facility at Erith, while it will soon be using robotic picking for orders in its Andover facility.

Steiner said: "Our performance last year was the result of many years of focus, dedication and perseverance: what we have called our "18-year overnight success". Our growth story, however, is only just beginning."

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