Ocado PLC (LON:OCDO) is always being called an online grocer, but in reality the group is more of a technology firm rather than a retailer, and the lack of news of further international tie-ups has weighed on the stock today as much as a warning over a hike in short term costs.
George Salmon, equity analyst at Hargreaves Lansdown pointed out: “The technology kitting out its highly impressive order processing sites is whirring ever faster, and with demand continuing to grow, Ocado has once again chalked up double digit revenue growth.”
READ: Ocado weak as rise in costs offsets news of strong growth in average orders
“However,” he added, “the debate around the shares doesn’t concern the speed of organic growth. The question is rather how many licensing deals Ocado can secure for others to use its software, and indeed how quickly.”
The analyst said: “Such deals would have a transformative impact, and back in June Ocado announced it had already got one over the line. With the group trading on a stratospheric price to earnings ratio, the market will be looking for more of the same to justify Ocado’s lofty valuation.”
Neil Wilson, senior market analyst at ETX Capital also noted that Ocado’s value is in the automated warehousing technology which it hopes to roll out globally with retailers and, with the shares trading at 166 times earnings it’s still got a lot to deliver.
Wilson pointed out that: “No further news of tie-ups will leave investors a touch disappointed, although the headline sales growth is pleasing.”
Another very strong quarter of sales
Ocado’s latest trading statement revealed another very strong quarter of sales growth as the online grocery shopping boom continues.
Group revenues, which include earnings derived from its tie-up with Wm Morrison Supermarkets PLC (LON:MRW), were up 14.3% to £344.5mln, while stripping out the Morrisons deal revenues were still up 13.1% to £312.7mln.
ETX’s Wilson noted: “Consumers are placing more orders but smaller ones – average orders per week rose 16% while average basket size was 1.2% lower at £106.25. This chimes with Morrisons results last week and with what we’re seeing more broadly in the supermarket sector.”
He added: “If consumers are spending less per order it would likely be negative for margins and profit growth, although the average basket size has actually rebounded after dipping to £105.61 last year.”
The analyst pointed out that Ocado said its costs will rise in the short-term as the group keeps ploughing money into its technology, which may be taken as an indicator of negative profit growth in the second half of 2017.