Can the Amazon-fearing Ocado deliver the goods with next Tuesday’s third quarter update?
There has been a lot for Ocado investors to process this year, explaining the company’s fairly erratic stock price. The last few months have taken in sub-£2.40 lows and £3.40-nearing highs, though for much of summer it has been stuck between £2.80 and £3.10. Ocado Group PLC (LON:OCDO) now sits at a current trading price of £3.11.
The first few months of the year – which included a 22% jump in annual pre-tax profit in January – look positively tame in comparison to the kind of swings Ocado has seen since mid-May. A robust rise in the back half of that month was swiftly undone in early June as the announcement that Ocado had finally secured a long-awaited overseas deal went down like a ton of bricks.
That’s because: a) Ocado didn’t reveal which European company it was working with, and b) it was to supply software to this mystery partner, not install technology in its warehouses. This was followed by a sharp fall in the middle of June as analysts and investors alike came away from a tour designed to show off Ocado’s new automated warehouse doubting the firm’s ability to justify the investment.
Things became even trickier from this point onwards, as Amazon (NASDAQ:AMZN) once again came to dominate investors’ approach to Ocado. News that the American giant has bought Whole Foods caused speculation that it might be interested in buying Ocado, only for the online grocer to quickly lose that snap growth as the full weight of what Amazon’s M&A action could mean for the company.
Its half year results in July didn’t help matters. There Ocado revealed a 9.4% fall in pre-tax profit to £7.7 million alongside a 1.4% drop in the average basket size (the impact of these figures was admittedly mitigated by a 15.6% rise in order volumes and, more importantly, a 12.7% surge in active customers).
Since then the stock has continued to bounce around, driven higher and lower largely in its relation to Amazon. The end of August saw a bit of good news, as Ocado both became the first UK supermarket to have an app for Amazon Echo and received a positive note from Citigroup (NYSE:C), who highlighted the value of its end-to-end automated warehouse solution.
This was countered, however, by an update from analysts at Deutsche Bank (DE:DBKGn). They argued that ‘even Amazon has concluded [with its Whole Foods acquisition] that an existing supply chain built around a store network of scale’ is a ‘more efficient’ method of fulfilling online grocery orders than ‘building a new network of dedicated warehouses’.
In terms of next week’s Q3 statement, investors will want to hear that active customer numbers are continuing to grow, alongside some signs that the firm will return to profit growth in the second half of the year.
Ocado Group PLC has a consensus rating of ‘Hold’ with an average target price of £3.12.
Disclaimer: Spreadex provides an execution only service and the comments above do not constitute (or should not be construed as constituting) investment advice or recommendations, or a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. Any person placing trades based on their interpretations of the above comments does so entirely at their own risk. Spreadex Ltd is a financial and sports spread betting and sports fixed odds betting firm, which specialises in the personal service and credit area. Founded in 1999, Spreadex is recognised as one of the longest established spread betting firms in the industry with a strong reputation for its high level of customer service and account management.
In relation to spread betting, Spreadex Ltd is authorised and regulated by the Financial Conduct Authority. Spread betting carries a high level of risk to your capital and can result in losses larger than your initial stake/deposit. It may not be suitable for everyone, so please ensure you fully understand the risks involved. In relation to fixed odds, Spreadex Ltd is licensed and regulated by the Gambling Commission under licence number.