What can we learn from Ocado’s soaraway share price?

The company has a unique business model, but it must deliver on its international promises.

Ocado (LSE:OCDO)’s unique business model, combining advanced technology with traditional grocery, is slowly beginning to reap the rewards of extensive investment.

At a top-line level, increased revenues of 35% for retail and 33% for the group as a whole reflect the opportunities which the pandemic has provided as shoppers hunker down and move to online shopping.

This has been especially noticeable in the US, for example, where Ocado cites that more than half of customers have bought produce online for the first time and that 70% of those will continue to do so post-pandemic.

The results reflect the period to the end of the November, so do not incorporate any festive bounce Ocado may have enjoyed, although recent numbers from Marks & Spencer (LSE:MKS) certainly imply that the joint venture continues to grow apace through Ocado Retail.

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At the same time, international service fees rose by 52%, and the group’s pre-tax loss of £44 million is a significant improvement on the previous year’s number of £214 million and indeed the consensus of £120 million. The figure was bolstered by an exceptional insurance payment of £100 million following the previous fire at the Andover facility, but nonetheless marks progress.

The capital expenditure line is where Ocado is showing its intentions. The figure of £526 million compares to a previous number of £261 million and is likely to rise further to £700 million. With its recent fundraising the company has access to £2.1 billion of liquidity, so the scale of the investment is not of immediate concern.

There is little doubt that the Solutions business is core to future growth and that its offering has huge potential for retailers around the globe in what remains a largely untapped market. At the same time, running the business at a loss due to heavy capital investment for longer term gains can also prove extremely successful and, indeed, in some ways is reminiscent of the Amazon strategy in its earlier days.

By the same token, the valuation of the shares is largely predicated on international growth aspirations.

These will need to be delivered in order to keep justifying a share price which has risen by almost 1,050% in the last five years and by 126% in the last year alone, as compared to a decline of 12.6% for the wider FTSE 100.

The combination of a grocer benefiting from the current pandemic and a high-tech business gives investors two bites at the cherry. But the stratospheric rise of the share price may have prompted some to take profits, with the market consensus of the shares having recently slipped to a ‘sell’ as new developments are awaited.