Why Ocado shares just soared 20% to seven-week high

There is some evidence that Ocado Group (LSE:OCDO) is finally beginning to turn its fortunes around, although in investment terms many have already left the building.

The group is largely driven by prospects at its Technology Solutions business as well as its joint venture retail operation with Marks & Spencer Group (LSE:MKS). The latter provides a far greater slug of revenues, which rose by 11% in the 26 weeks ended 2 June, alongside adjusted earnings which improved to £20.7 million from a previous negative figure of £2.5 million.

• Invest with ii: What is a Managed ISA? | Open a Managed ISA | Transfer an ISA

The improvement was a result of higher volumes and an increase of 8.1% in the active customer base, which now stands at 1.04 billion. Meanwhile, its online market share increased from 11.4% to 12.3%, with some of its price-match offerings to competitors increasingly establishing its value proposition as opposed to the higher end reputation which it previously carried.

The Solutions business has tended to be the thorn in the side for the group, as partnerships with retailers who use its revolutionary robotic technology simply not coming through at a sufficient pace to keep up with the necessary investment thus far.

This is an area on which the group is understandably focused and in the coming months it is expected that a further three Customer Fulfilment Centres (CFCs) will go live, with further enhancements to the technology likely to consolidate the group’s unique position. Indeed, since the end of this reporting period a third CFC in Japan, which should begin operations in 2027. 

The incremental improvement in Technology Solutions has led to some more promising figures, with a 22% rise in revenues accompanied by adjusted earnings of £35 million, compared to £5.9 million previously. Margins improved to 15%, prompting an upgrade to the outlook statement from management. Revenue growth of between 15% and 20% is the next target, while the group continues to court new potential partners.

• Sign up to our free newsletter for share, fund and trust ideas, and the latest news and analysi
• Shares for the future: a FTSE 250 stock in top half of my list
• Insider: director backs FTSE 100 stock’s revival
• Ocado shares slump after Canadian supermarket's decision

At the group level, the progress has not halted the overall direction of the business, which posted a loss of £154 million. Even so, this represents a significant improvement from a previous number of £290 million, largely driven by cost control and lower capital expenditure, in addition to the improved earnings margins and overall revenues.

As such, the cash outflow also improved to £197 million from £298 million, with the group now anticipating an improvement over the year of £150 million, in excess of the £100 million which it had guided previously. 

However, signs of exasperation with the group’s progress have been starkly expressed in the share price performance. Sellers of the stock have largely been pushing against an open door, as evidenced most recently when the shares fell by more than 10% on a broker downgrade yesterday.

Ocado’s relegation from the FTSE 100 in June followed a turbulent time which has seen the share price crater by 81% over the last three years, despite some vague bid speculation surrounding the stock which subsequently came to nothing last year. That being said, a prospective buyer with more sanguine views on growth prospects would hardly come as a surprise, and the share price decline may have left the company vulnerable to a bid approach. 

The volatility surrounding the stock has again been highlighted by an extremely positive reaction to this release at the open, with the shares spiking by as much as 20%, erasing yesterday’s fall but leaving the group still nursing losses in the recent past. Indeed, even after this initial jump, the shares have declined by 31% in the last year, as compared to a gain of 14% for the wider FTSE 250 (and, for comparison, a rise of 10% for the FTSE 100 where the stock was a constituent for most of that period).

• 10 hottest ISA shares, funds and trusts: week ended 12 July 2024
• Stockwatch: time to begin averaging into this sector
• Top-performing fund, investment trust and ETF data: July 2024

The scale and capability of the group’s cutting-edge robotic technology remains rightly much admired, but the large swathes of investment have yet to deliver profitability on anything like a sustainable basis, even if there are increasing signs of progress.

As such, the market consensus remains rooted at a 'hold', albeit a strong one, with investors generally looking elsewhere for more obvious and immediate growth opportunities, despite the welcome boost of today’s initial share price reaction.