Should you avoid online ‘darlings’ Ocado Group plc, AO World plc and Just Eat plc?

In the last few years online stocks have been the “must own” companies around the world. There have been some incredible success stories such as Amazon, Google (properly called Alphabet now) and ASOS.

Today I’m looking at three online based companies listed in London and asking whether they are ‘must own’ or better avoided?

Online supermarket

Ocado Group (LSE: OCDO) was one of the most talked about IPO’s when it floated in 2009. Since then the business has doubled revenues and finally made a profit. However there are definitely some red flags on the company’s balance sheet.

Debt has risen from nothing in 2010 to £127m and cash balances are dwindling at £45m down from £154m in 2010. Ocado is a growing company so it is expected that management use debt and cash to grow the business, but the business is yet to generate consistent profits. Having made only £11.8m net profit last year the company also trades on a lofty price-to-earnings (P/E) ratio of 120, which is expected to fall to 80 next year.

For many money managers out there the growth just isn’t fast enough to justify such a lofty valuation, and this is reflected in the 17.9% short interest in the stock. 

Household appliances

AO World (LSE: AO) is another online shop, but instead of groceries it sells household appliances. Unlike many other online based businesses AO World is struggling. 2015 was another loss making year for the company and despite growing revenues by close to £100 million the company still made a £2.5m loss. 

Short interest is relatively high in AO World, too, and is currently sitting at 2.7%, having been as high as 4.5% in the summer of last year. The company prides itself on offering the lowest prices and the best customer service, but hasn’t yet been able to turn this into any returns for shareholders. 

Takeaway intermediary 

Just Eat (LSE: JE) has been performing very well of late. After the first quarter  of 2016 the company upgraded full year revenue expectations by £8m to £358m and EBITDA by up to £6m. This has boosted its share price by about 10% since the announcement and there could be more upgrades on the way if the second quarter is as good as the first.

The company trades on a P/E of 109 which again is lofty, but as a growth stock it isn’t ridiculous — if the company hit targets this year then P/E drops to below 40. This would indicate that Just Eat could see a large increase in share price if targets are met. With the possibility of more 2016 guidance upgrades on the way then the share price could rise substantially this year. 

Overall, of these three internet stocks only one is attractive to me. Ocado and AO World still have to prove that their business models work and that profits can be generated consistently.

However, Just Eat is operating well and 2016 looks like it could be the best year yet for the business, and be the fourth year of profits in a row.