Ocado’s Share Price Valuation Splitting Opinion More than Raheem Sterling

Published On: July 12, 2018Categories: Stocks & Shares2.2 min read

UK groceries delivery and warehouse technology company Ocado yesterday announced that it is to pay out £14 million in bonuses to senior management and other staff. The sum has been upped by £9 million from earlier forward guidance that the company’s bonus schemes would come in at £5 million. The extra bonus allowance comes as a result of Ocado’s soaring share price, which has risen by over 250% in the past year, taking the company’s price-earnings ratio to around 7455.

Despite a £9 million loss over the first half also reported yesterday, Ocado’s now worth just over £6.5 billion. The company earned £800 million in revenue over the 26 weeks leading up to June 3rd, a 12.1% improvement on the previous period. However, last year’s £7 million profit reversed into a £9 million loss due to investment in the company’s Ocado Solutions division which licenses automated warehouse technology.

Ocado has recorded losses over most of its 18-year history since being founded in 2000 by three former Goldman Sachs employees. Until recently it was one of the most shorted companies on the London Stock Exchange. Many doubted whether a perpetually loss making online groceries delivery business with no retail business of its own and reliant on partnerships with supermarkets was a viable business model. Now it trades at one of the highest multiples ever seen on the London Stock Exchange. To put Ocado’s 7000+ multiple into context, Amazon’s is currently around 370.

So why and how is the company’s p/e ratio so mind bogglingly high when it makes most of its money delivering groceries for Waitrose and Wm Morrison? Those investing online in Ocado are banking heavily on the company’s ‘Solutions’ business. This makes, and has a range of patents on, warehouse automation technology. The biggest boost to the Ocado share price over the past few months came after the company announced an exclusive deal with U.S supermarket giant Kroger to license its warehouse technology. A number of other international deals have also been announced over the last several months including with France’s Casino, fuelling hopes the technology will become the industry standard.

However, the unit is still young and recorded revenue of only £63.5 million in the first half, up from £54.2 million. It recorded a £2 million loss on an adjusted basis, expected to rise over the remainder of the year.

The company’s fans think that Ocado Solutions is on the brink of becoming the ‘operating system’ standard for warehouses in a way comparable to Microsoft Windows is for computers and Android for smartphones. Detractors say the current valuation is nothing short of absurd. Battle lines have been drawn and the debate is raging. It’s fair to say that second to Raheem Sterling’s contribution to England’s World Cup cause, a groceries delivery service has become the summer’s most controversial opinion splitter in the UK!

About the Author: Jonathan Adams

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