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Ocado - trading progressing well, but not the main story

George Salmon | 18 September 2018 | A A A
Ocado - trading progressing well, but not the main story

No recommendation

No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.

Ocado Group plc Ordinary 2p

Sell: 1,583.50 | Buy: 1,585.50 | Change -41.00 (-2.52%)
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Ocado has released a brief trading update covering the 13 weeks to 2 September 2018, the third quarter of its financial year.

It confirms retail revenue has increased in line with guidance, and that recently opened sites have come online smoothly.

The shares rose 3.6% on the news.

View the latest share price and how to deal

Our view

Ocado is worth over £6bn.

If your first thought was 'that's a lot for a business that's little more than a fleet of delivery of vans scurrying around the country delivering upmarket groceries', you'd be right. But Ocado is much more than a niche online supermarket.

Its cutting edge systems are capable of fulfilling tens of thousands of orders every day, largely without human intervention.

The longer-term goal is for those whirring technology systems to become a product themselves, with other retailers paying license fees to make use of them. Providing the template of online shopping the world over could make its services almost indispensable - by playing the same role in retail that Microsoft's operating systems do in computing.

A lucrative outcome, to say the least. But until last year it required more blue-sky thinking than we'd have liked. Agreements with retailers in Canada, France and most recently, a major deal in the US, have changed that though. And to borrow from the great economist John Keynes, when the facts change, change your mind.

The sudden burst of deals may have been instigated by the aggressive growth strategy of one of the biggest disruptors out there. Amazon's $13.7bn acquisition of Whole Foods, and the roll-out of its own grocery service, means its tanks are now parked even closer to traditional supermarkets.

Regardless of the whys and wherefores, Luke Jensen, head of Ocado's Smart Platform, will surely be walking into meetings with potential partners with a spring in his step. He's already exceeded most expectations, and there could yet be more deals to come.

With Ocado in the growth phase, dividends are unlikely in the foreseeable future. However, we think the group's right to allocate every penny to making the most of the opportunities in front of it.

Investors shouldn't forget the positive impact on the income statement won't be felt for some years yet, and a dramatically increased share price puts pressure on it to execute smoothly. Still, Ocado will be delighted to be in this position.

An added bonus is its largest UK sites are now online, which gives Ocado the chance to show other interested parties what it can do on a grander scale.

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Trading details

Ocado's retail revenue rose 11.5% to £348.6m. With the average customer still checking out with a shade over £106 in their virtual basket, growth was driven by a greater number of orders. Ocado processed an average of 283,000 orders per week, up from 254,000 in the same period last year.

Some of that extra capacity was handled at the new sites at Andover and Erith. The group notes how, only 14 weeks after opening, Erith processed over 20,000 customer orders.

Tim Steiner, Ocado CEO said these sites "provide new opportunities for growth in our UK retail business while showcasing the scalability, adaptability and efficiency of our platform."

Find out more about Ocado shares including how to invest

Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.