Ocado burst onto the British supermarket scene in 2000. Almost immediately it became associated with cutting-edge online shopping innovation and wholesomeness: its name derives from the avocado, an appropriately aspirational fruit for an upmarket grocer.
Subsequently Ocado, now a member of the FTSE 100, has never been far from the headlines.
Its vans are a familiar sight, but it is also the leading global force in automated ecommerce warehouses. It promises: ‘We are on a mission to change the way the world shops, for good.’
There is admiration for its ambitions but also dissatisfaction over the size of its losses which, even in 2027, may still total an annual £115m.
Richard Hunter of Interactive Investor calls Ocado the perennial ‘jam tomorrow’ stock. The shares have jumped by 324 per cent since flotation in 2010 but are down by 78 per cent since their peak of 2895p in September 2020 – the era of the ecommerce stock love affair.
Is there now a chance that the shares could return to this level – allowing investors to sample the equivalent of a £7.50 Daylesford Organic ginger and rhubarb preserve available from Ocado? Or will it always be jam of any variety tomorrow?
The consensus price for the shares among analysts who follow Ocado is 841p, against the current 687p. But Ocado remains one of the most ‘shorted’ shares, suggesting some are unimpressed.
Confounding these and other pessimists, the price jumped by 20 per cent this week, as relief over the half-year results overwhelmed misgivings over the outlook.
The overall losses may have mounted to £289m, but the Technology Solutions division is finally making a profit.
This operation licenses customer fulfilment centres (CFCs) with product-picking robots to supermarkets worldwide such as Aeon in Japan and Kroger in the US.
Chris Beauchamp, chief market analyst at IG Group, said the advances at Tech Solutions were a reminder that ‘the great hope for Ocado shares is that they can license their technology to a broad audience around the globe, rather than being just another UK supermarket’. William Woods of brokers Alliance Bernstein has said ‘nothing in the world’ can compete with Ocado automation.
In June, the shares soared for another reason: rumoured takeover interest from two parties: tech titan Amazon and Lingotto, a fund backed by the Italian Agnelli dynasty and chaired by former chancellor George Osborne.
Clive Black, head of research at Shore Capital and an Ocado sceptic, calls these reports ‘spoof bid stories’, pointing to the apparent lack of any intervention by the Takeover Panel. Others said speculation began when Ocado faced relegation from the FTSE 100 over its lower market capitalisation.
Others say Amazon, which owns Whole Foods, would be deterred by the cost of the capital expenditure required by Tech Solutions at a time of high interest rates.
Taking a bet now on Ocado is a leap of faith on the onward march of Ocado’s CFCs, but Baillie Gifford is among those confident the clientele will expand.
The fund manager is the second-largest investor, with a 12pc stake spread across funds including Edinburgh Worldwide and Scottish Mortgage (I’m an investor).
But buying the shares now is also a gamble on the retail subsidiary, which still accounts for 86 per cent of revenues. The joint venture with Marks & Spencer is on a ‘pathway’ to profit, as Ocado boss Tim Steiner puts it.
However, the M&S boss Stuart Machin is not happy with the division’s performance – nor is chairman Archie Norman. Ocado Retail is gaining customers, yet it is possible M&S may not have to pay the final instalment on the deal next summer. The sum due has already been reduced from £190m to £78m.
As an M&S shareholder, I’m also unhappy. Despite the 62 per cent leap in the shares this year its turnaround would be aided by more sparkle from the joint venture.
As a user of the Ocado app since 2009, I have been finding the offer less appealing. Cost-conscious households want competitive prices but also some more expensive treats. I wonder if these are presented with sufficient allure. Also, M&S ranges seem less well promoted on the app than those of predecessor Waitrose.
As a result of what Hunter calls ‘laborious progress’, analysts rate the stock a ‘hold, but he adds that it is a ‘strong hold’. If you want to back a pioneering British tech business, even believers like Woods emphasise that you must take a three-to-five-year view.
There is no guarantee Ocado will deliver – but wouldn’t it be marvellous if it did?
