Online grocer Ocado PLC (LON:OCDO) delivered another blow to those shorting the stock, as its shares soared nearly 30% higher today after it unveiled yet another international deal for its smart platform.
The stock is the third most shorted stock on the London market, with around 13.5% of the company on loan, according to data from shorttracker.com, only behind embattled department stores group Debenhams PLC (LON:DEB) and collapsed construction contractor Carillion PLC (LON:CLLN).
READ: Ocado signs third international partnership with Canada's second largest food retailer, Sobeys
But the short sellers got burnt today, as the FTSE 250 listed shares jumped 29%, or 120.4p higher to 533.4p after it revealed plans to develop an online grocery business in Canada in partnership with the country's second largest food retailer, Sobeys Inc.
Sobeys - which is owned by Toronto listed Empire Foods Limited (TSE:EMP.A) - operates more than 1,500 stores across Canada, generating sales of C$23.8bn in fiscal 2017.
Laith Khalaf, senior analyst, Hargreaves Lansdown noted: “Ocado is really delivering the goods for shareholders, after clinching another deal to license out its online delivery platform.”
He pointed out: “As one of the most shorted stocks in the UK stock market, this deal will be a poke in the eye for the hedge funds who have bet against Ocado. The share price has now risen by around 50% in the last six months, inflicting some serious pain on anyone who has shorted the stock.”
Eye-watering valuation
Khalaf said investors have been tempted to bet against Ocado because of its eye-watering valuation.
“At 140 times earnings, the online retailer looks like an extremely pricey bit of kit. However, its share price is looking forward to future earnings based on licensing out its online delivery technology, rather than the revenues it’s currently making from food retail. In this respect, Ocado is more Amazon than Asda,” the Hargreaves analyst added.
He concluded: “It still remains to be seen how much profit these deals actually deliver, but for now Ocado is definitely defying its doubters.”
Neil Wilson, senior analysts at ETX Capital noted that the agreement with Sobey’s comes just a couple of months after Ocado joined forces with Groupe Casino in France.
READ: Ocado surges on second international partnership, with Casino signing deal in France
“As we noted then, the Casino deal was likely to be the launch pad for many more international partnerships. More should follow in 2018 but these deals are not immediately earnings accretive and the share price is still trading at very high multiples,” he added.
Meanwhile, Shore Capital analyst Clive Black said that “from a financial perspective, as usual, we enter the realms of smoke and mirrors.”
He pointed out: “Ocado speaks of the long-term benefits, again, noting that the business is fifteen years in the making with barely a positive financial return, especially after capitalising development costs.”
The analyst said he welcomes the Sobey's announcement as evidence that Ocado is broadening its client reach, something that is essential to any form of commercial future.
Different valuation metrics
Black noted that Ocado is no longer a grocer in reality – “it failed at that from a meaningful financial and market share perspective” – rather, he said, it is “a technology supplier to the grander grocery industry; so working on different valuation metrics.”
That said, the analyst added, Ocado has “had a charmed life as an equity investment, one that we believe is still more superficial than real, one that still needs to be more relevant and substantial in the global grocery eCommerce world if it is to sustain elevated stock ratings.”
He concluded: “No doubt the market will warm to the broader customer base today though and overlook the substance beneath the sheen leading us to expect the stock to possibly be marked up further as, to be fair, long-standing evangelists have their day.”