Amazon.com Inc’s (NASDAQ:AMZN) disruption of the grocery market seems to be working in Ocado Group PLC’s (LON:OCD) favour.
Since completing the acquisition of Whole Foods last August, Amazon has become a growing threat to supermarkets as the online e-commerce giant expands its grocery business.
Traditional supermarkets have started to take notice of the shift towards e-commerce with some turning to Ocado to help set up their online grocery delivery service.
“With a rival like (Amazon) prowling around, it’s no surprise grocers the world over are looking at their online operations with a new sense of urgency, and teaming up with Ocado to counter the threat from the US retail juggernaut,” said George Salmon, equity analyst Hargreaves Lansdown.
In the first half of this year, Ocado signed three new international deals for its e-commerce software (the Ocado Smart Platform) including with Canada’s Sobeys, Sweden’s ICA and America’s Kroger.
READ: Ocado posts first half loss but revenues rise as it signs new international deals
Ocado also has partnerships with Morrison Supermarkets PLC (LON:MRW) and Groupe Casino in France.
Ocado's future as a technology provider
“A series of licencing deals means the Ocado of the future is more likely to be described as international technology provider than niche online grocer,” Salmon said.
“We suspect the spate of deals, which are creating thousands of jobs, owes much to Amazon’s moves to expand into the grocery market.”
Having signed a number of new international deals recently, Ocado has had to invest more in developing its smart platform and expanding its capacity.
Higher investment spend led to a 13.9% drop in underlying earnings (EBITDA) to £38.9mln in the first half.
A 12% increase in total revenue to £799.9mln was not enough to offset the increased costs.
"Overall this is very much another set of mixed results from Ocado," Shore Capital said.
"The revenue growth of 12% continues to come through but this is not translating into earnings, which continues to be Ocado’s Achilles heel."
Ocado still an online grocer for the most part
The group’s technology services business, Ocado Solutions, has been growing at a rapid pace but the retail division still accounts for a larger part of revenues.
Retail revenue in the first half grew 11.7% to £736.6mln while Solutions revenue increased 16.8% to £63.3mln.
Based on the latest financials, Ocado has a way to go before it can call itself a technology provider.
“Although Ocado would like to be seen as a technology company, its half year results paint a very different picture,” said Russ Mould, investment director at AJ Bell.
“It generated 11 times more revenue from selling groceries than supplying technology systems and services.”
Mould added: “Admittedly the business has done very well in the past year by signing up more international partnerships using its software, algorithms and robotics systems. But that’s all about the future. Today is about a company generating sales by delivering food and drink to UK consumers.”
Ocado share performance 'outstanding', says Numis
Broker Numis left its rating on the stock at ‘buy’ with a target price of 1,250p, citing a “solid” first half report from Ocado.
Numis analyst Andrew Wade said he was “encouraged” by the expansion of CFCs and the positive remarks on the scale-up of Ocado’s capabilities.
“The shares have had an outstanding run (+256% over 12m), reflecting recognition of the value in the Solutions division, the earnings runway afforded by the recently signed deals, and the validation of the OSP concept,” he said.
“We believe that Ocado has developed the leading global solution for online grocery delivery, and see more to go for.”
In mid-morning trading, shares rose 1.2% to 1,024p.