Ocado Group (LSE: OCDO), AO World (LSE: AO) and Just Eat (LSE: JE) have been three of the big internet stock casualties of the last three months.
However, all three have bounced back strongly in the last four weeks, leaving me wondering whether it’s time to lock in gains from this short-term bounce, or whether there are longer-term profits to be had.
| Company | % fall since 11 March 2014 | % gain since 12 May 2014 |
|---|---|---|
| AO World | -32% | +10% |
| Ocado Group | -31% | +19% |
| Just Eat* | -15% | +10% |
*Just Eat only floated in April 2014.
AO World
This online appliance retailer operates with big volumes, but wafer-thin profit margins.
Indeed, it’s rumoured that without the commission from the insurance products AO World sells alongside its appliances, AO World might actually be losing money.
AO World’s sales rose by 40% to £385m last year, but its operating margin fell from 3.1% to 2.1%, suggesting that it is failing to benefit from economies of scale.
Although expansion costs may be weighing down the firm’s profits, AO World doesn’t seem to have any competitive advantages over its many competitors, which means price and margin pressure will be relentless.
With a 2015 forecast P/E of more than 9,000, I rate AO World as a sell.
Ocado Group
Ocado is another firm with rising sales but feeble profits. Currently trading on a 2015 forecast P/E of 67, Ocado’s sales are expected to rise by around 20% this year, to almost £1bn.
The firm is banking on rising sales from Morrisons.com and its own Waitrose food sales to boost profits, but I’m not convinced.
Distribution (i.e. delivery) costs swallowed up 80% of Ocado’s gross profits last year, and I don’t see this changing, thanks to the relatively long distances the firm has to travel to deliver its orders, compared to store-based delivery services such as Tesco and Sainsbury.
I continue to rate Ocado as a sell.
Just Eat
Online takeaway-ordering service Just Eat does actually make a reasonable profit — the firm reported post-tax operating profits of nearly £7m on sales of just under £100m last year, giving a 7% operating margin.
However, competitors such as Hungry House appear to offer more or less the same service, which makes me suspect that in the medium term, companies in this sector may be forced to cut prices in order to defend their market share.
Just Eat trades on a 2015 forecast P/E of 46, but I fear it could struggle to justify further upgrades, and rate the firm as a sell.