Down 45% in a year, is the Ocado share price about to soar?

Online retail specialist Ocado (LSE: OCDO) has had a terrible year — its shares are now 45% lower than they were 12 months ago. The Ocado share price did jump earlier this month after its retail arm Ocado Retail (a joint venture with Marks and Spencer) issued an upbeat trading statement.

It has since drifted downwards again, but still, could this be year we see a turnaround in the share price?

Here’s why the market got excited this month

The statement showed strong performance from the retail operation, with revenues in the fourth quarter growing 18% year on year. For a mature market such as selling groceries, I regard that as excellent performance.

The number of customers also grew in double digits, which was largely the performance driver, rather than a significant shift in basket size or value.

That is fine, but it does raise a question of why Ocado was not able to get existing customers to buy more. Recruiting new customers is all well and good. However, it is typically more cost effective to sell a bigger number of items, or more costly items, to existing ones.

The company expects full-year revenue growth of 14%, resulting in “strong” growth in EBITDA (earnings before interest, tax, depreciation, and amortisation).

After a record Christmas, the company said that it expects this year it can “continue to show market-leading sales growth and volume momentum”.

Here’s why I’m less excited

That is indeed an excellent trading statement when it comes to sales. We need to wait until the release of the company’s full-year results next month to get the full profit picture, though.

But Ocado has two parts – and the Ocado Retail joint venture is only one of them. It has long been a decent performer. Indeed, in the (increasingly distant) days when Ocado actually made a profit, that reflected strength in the retail operation.

The other part of Ocado is the division that sells its online retail fulfilment capabilities to fellow retailers worldwide. This is the part of the business that I think has led to such a steep decline in the Ocado share price over the past five years.

The problem is that it has not yet shown that it has a viable business model in the long term. It has burnt through vast sums of cash setting up the infrastructure needed to service its clients, like distribution centres.

That should position it well to fulfil long-term contracts. And, hopefully, over the lifetime of such deals, the income will more than cover the costs.

However, while that is well in theory, in practice it remains to be seen. Shifts in the retail landscape – such as how long customers expect to wait before receiving delivery – could have significant impacts on the current model’s viability.

So while the Ocado Retail operation looks decent to me, it is lumped together with a consistently loss-making division that has yet to prove its long-term viability in my view.

The current market capitalisation of £2.6bn is not a bargain for those two businesses taken together, I feel. And I see no rational reason for the share to soar soon. I have no plans to invest.

The post Down 45% in a year, is the Ocado share price about to soar? appeared first on The Motley Fool UK.

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C Ruane has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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