Can struggling online supermarket Ocado deliver the goods?

Ocado, the tech-focused online supermarket, is dividing opinion. It’s the Pot of Business: Investors either love it, confident in its potential to produce handsome rewards, or hate it precisely because of that “jam tomorrow” promise.

Shares in the company – founded 22 years ago and named after the lawyer, minus the first two letters – have plummeted.

At the height of the pandemic home delivery boom in September 2020, shares hit 2800p each. They are now 70% lower, at 810.8p.

Does this represent a reality check? Or a simple setback on the way to fulfilling the prediction in 2020 that the price could hit £100 by 2030?

After all, as Hargreaves Lansdown puts it, “Ocado is the only global provider of an end-to-end online grocery platform,” which is great for those who want to support UK innovation.

FundCalibre’s Darius McDermott says stocks may have been overvalued in the age of Covid, but the deployment of AI and robotics makes Ocado different: “It’s so much more than a grocer.”

Reflecting this status, Ocado’s market capitalization of £5.8 billion exceeds that of Sainsbury’s, which is £5.4 billion. But critics say that unlike Sainsbury’s, Ocado has only made a profit three times in its history and may struggle to do so in the future.

Huge expenditure is required for the development of the grocery picking robot technology used by Ocado, but also sold to other supermarkets, such as Kroger, an American chain, Spain’s Alcampo and Casino, based in France. Some wonder, however, how lucrative these transactions are.

Meanwhile, Ocado Retail’s revenue growth is slowing, thanks to higher energy bills, the cost of living and a cooling love affair with online shopping. This joint venture with Marks & Spencer is the company behind the delivery vans you see on the streets.

Food delivery is also becoming more competitive. Sainsbury’s and Tesco have successfully expanded this part of their operations. These supermarkets and others are partnering with apps like Getir, Gorillas and Zapp that provide fast delivery of avocados and other necessities.

Ocado was forced to rename its own Zoom app to Zoom by Ocado. The “Z” in the original logo was felt to resemble the “Z” that became Russia’s insignia during the war in Ukraine.

Another bone of contention is the pay of Tim Steiner, head of Ocado since 2000. Under an incentive scheme, he could bring in £100million over five years. Royal London Asset Management (RLAM) was among those who voted against the plan this month.

Ocado loyalists, relieved to have won a crucial legal battle with Norwegian robot group Autostore over patents, believe Steiner deserves such awards.

They point to the bounty that could emerge during this time if she triumphs in the robot wars.

Its 600-series robot, produced by 3D printing, is expected to cut labor costs by a third. Brokers Bernstein said such advances could turn Ocado’s warehouses, or CFCs (customer processing centers) into “cash machines”.

Indeed, the company expects CFC EBITDA to increase by 50%. Ocado defines EBITDA as earnings before net finance costs, taxes, depreciation, amortization, depreciation and exceptionals.

You may never have subscribed to the quasi-messianic belief that surrounds Ocado. But you have an interest in it if you save in the RLAM funds or in the Edinburgh Worldwide and Global Discovery trusts of Baillie Gifford. If you’ve owned stocks for a decade, you’ve seen their value rise by 570%, which may tempt you to tolerate the current misfortune in hopes of a recovery.

HSBC upgraded the shares from ‘sell’ to ‘hold’, although it reduced its target price from 1100p to 1000p. Credit Suisse also lowered its target price from 1650p to 1600p, but this broker expects Ocado to outperform.

Rathbone’s David Coombs warns Covid-era high prices may not be achieved again for the next five years.

He adds: “I always wanted to buy Ocado. But I could never bring myself to do it because, although it had a great, great story, it fell short. During the pandemic, it has not taken full advantage by making the most of the clientele.

At that time, as a long-time customer, I couldn’t get a delivery slot. The broader doubt triggered by this irritation made me decide not to buy the shares.

The desire to grab a bargain can be hard to resist when prices have fallen. Still, it may be wiser to consider stocks whose prices have fallen, not fallen.

Take this other company named after a fruit – Apple. Its shares are down 19% this year. There will be more pain to come, but also more profits, which matter more than ever.

Some links in this article may be affiliate links. If you click on it, we may earn a small commission. This helps us fund This Is Money and keep it free to use. We do not write articles to promote products. We do not allow any business relationship to affect our editorial independence.

Comments are closed.