UK Edition
Questor: Ocado is the stock investors love or hate. We love it for its hi-tech and growth prospects
Questor share tip: grocer can deliver benefits from global boom in online food shopping and by expanding its tech into farming and freight
Few FTSE 100 stocks divide opinion more than Ocado.
The online grocery business is revered by some investors for anticipating a world in which more and more consumers use the internet for their weekly shopping.
Over the past decade the proportion of shoppers in Britain who buy groceries online has doubled to 30pc. Further growth is likely as online grocery shopping becomes increasingly convenient thanks to improvements in mobile technology and faster broadband.
Rivals are ploughing vast sums into improving their online grocery services but Ocado remains the only major British supermarket without physical stores. This might give it a competitive advantage as the appeal of out-of-town hypermarkets gradually declines.
Other retailers such as Morrisons are using Ocado’s proprietary technology to launch delivery services, while M&S will replace Waitrose as Ocado’s partner from September. The deal with M&S creates a 50:50 joint venture which could broaden Ocado’s customer base.
It is, though, unlikely to be the main driver of its growth: Ocado is gradually shifting focus towards being an international technology business.
To achieve this goal it has significantly increased its investment in new technology in recent years, enabling it to form partnerships with nine major retailers in countries such as the US, Japan and Australia.
Such partnerships not only diversify the business and reduce its reliance on Britain in an era in which weak consumer confidence has become the norm, they also give Ocado access to high growth rates in countries in which online grocery services are less developed.
For example, it plans to open 20 distribution centres in America over the next three years through its partnership with Kroger, the retailer.
This provides Ocado with the potential to benefit from a grocery market valued at $1 trillion (£772m) in which only 3pc of overall spending currently takes place online.
Over the next five years, online grocery sales in North America are expected to double. On a global basis, they are forecast to grow at an annual rate of 15pc between 2020 and 2024.
Ocado’s fulfilment technology also has scope for wider use in non-grocery retail operations, as well as in industries such as vertical farming and freight handling. This could allow the business to become increasingly diverse over the long run, while its investment in innovation should strengthen its competitive advantage in the meantime.
It recently launched Ocado Zoom, which allows customers to receive their groceries within an hour of the goods being ordered and has the potential to improve its already good customer satisfaction ratings as it is rolled out.
The company’s investors are also likely to be satisfied with its recent performance. Its shares have delivered an annualised return of 26pc in the past five years.
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Now for the retailer’s critics: they are likely to highlight its loss-making history and expectations for its bottom line to remain firmly in the red over the next two years.
Its plans to open 30 distribution centres over the next three years present logistical challenges. Meanwhile, its switch from selling Waitrose to M&S products may not improve its performance in Britain during a period of intense competition among online grocery retailers that is likely to be evidenced in its forthcoming trading update.
Following its share price rise, Ocado trades on a price-to-sales ratio of 4.6 (we cannot use the more familiar price-to-earnings ratio because of the absence of profits).
This is vastly higher than the valuations of its major peers and shows that investors expect a long-term future of exceptional growth.
This fact is likely to polarise opinion among investors about the company’s prospects. Undoubtedly, Ocado is a risky investment proposition. But its proprietary technology, its exposure to growing retail markets across the world and the increasing popularity of online grocery shopping mean that it could deliver further capital growth in the long run.
Questor says: risky buy
Ticker: OCDO
Share price at close: £11.22
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