Shares in Ocado top the FTSE 100 leaderboard with a very smart gain and the reason behind this must be the comprehensive legal ruling in favour of the British firm against Norway’s Autostore in the USA, because the trading update offers further profit forecasts downgrades and more promises of ‘jam tomorrow.
Since its flotation on the London stock market in 2010, Ocado has generated a total of £15.5 billion in revenues, including the £2.6 billion forecast by analysts for the year to November 2021.
It has turned those sales into an aggregate pre-tax loss, on a stated basis of £560 million, including the £252 million deficit predicted by analysts for the financial year that has just ended.
AJ Bell Investment Director Russ Mould said: “Increased staff costs, investing in marketing and technology and start-up costs associated with new warehouses mean increased losses in the near term, even as revenues rise, and a further delay in that elusive move into the black.
“And after today’s trading updates about increased wage costs and investment, analysts now expect the firm to lose £567 million in the next three years alone.
“Even using Ocado’s preferred metric of EBITDA – earnings before interest taxes depreciation and amortisation – profits are expected to be no higher in 2022 than they were in 2014, after this latest round of investment.
“Again, the future offers the tempting prospect of rapid earnings growth – but tomorrow never comes, so it seems. This still means the food delivery model has yet to prove itself in terms of profits and cash flow, although Ocado’s customers will be grateful that Ocado’s shareholders remain content to subsidise their grocery deliveries.
“Ocado’s £12 billion market capitalisation will therefore remain a mystery to some, especially as growth rates appear to be waning, despite rising food prices, the ongoing pandemic and the uplift in orders per week in the wake of the joint venture with Marks & Spencer.
“Such considerations may help to explain why the shares are down 40% from their 2020 highs.
“Yet bulls of the stock are clearly unperturbed and happier to focus on the legal ruling in Ocado’s favour at the expense of Autostore, which is suing for patent infringement over robotics and automation technology used in the distribution centres.
“Part of this may be because Ocado’s grand plan may be to focus on the Ocado Smart Platform (OSP) and license out its automation technology, which already has nine customers, spread across the UK, Canada, USA, Sweden, Spain, France, Australia and Japan.
“It could then look to shed the food delivery business altogether, which has ultimately made large losses over a long period of time. A final, comprehensive victory in the courts over Autostore would make it easier to do this.
“M&S already owns 50% of the operation and would be the logical buyer for the 50% that Ocado still has, especially as the deal has plugged a big strategic hole for Steve Rowe and Archie Norman. Whether they can get delivery to actually turn a profit could then be the next big issue for investors to consider as they consider the progress in the turnaround at M&S.”