You know something might be wrong when your favourite growth share is the worst performer in the FTSE 100. And that’s exactly what happened to Ocado Group (LSE: OCDO) Thursday. Well, not that it’s actually my favourite growth share, but you know what I mean. The Ocado share price ended the day losing a fraction over 7%. So what happened?
The obvious suspect is Thursday’s Q4 trading update from Ocado Retail, the joint venture formed between Ocado Group and Marks & Spencer.
The only thing is, the valuation of Ocado shares is not remotely based on current trading. No, we’re looking at a company whose last positive year-end P/E figure stood at more than 250. That was in 2016, and we’ve seen increasing annual losses since then.
These are impressive lockdown results
Anyway, what did the update say? And what light can it cast on the mini-slump in the Ocado share price? The figures looked good. And Ocado Group upped its full-year guidance for the third time this year, indicating EBITDA of over £70m.
Retail revenue for the quarter is up 35%, with average orders per week up 3%. We can’t really tell what that means for the long term, mind. Revenue has been significantly boosted by the pandemic, and what a normalised week will look like is something we’ll have to wait and see. But it does at least suggest shoppers do like the tie-up with M&S. The two increasingly look like a good match.
What’s driving the Ocado share price?
None of this helps me make sense of the Ocado share price, or why it fell on such positive figures. Maybe investors are finally latching on to the comparative valuations of Ocado and competitors like Tesco.
According to the latest Kantar figures, Ocado accounts for a mere 1.7% of the UK groceries market. And the valuation of the company? Ocado’s market capitalisation stands at a rather blinding £16bn. Tesco, meanwhile, is valued at £22.5bn, or 40% higher. That’s with Tesco commanding a massive 27% of the market, more than 15 times Ocado’s share.
So perhaps people are actually starting to see Ocado more as an online supermarket, and less as a jam-tomorrow shopping technology company. The latter is a key part of whatever attraction the Ocado share price has. And I do think there’s plenty of potential there.
Where’s the technology going?
If anyone wants in on the online market, Ocado has the whole package of logistics, software, the lot. And it’s landed some impressive contracts around the world. But when is that arm of the business going to start bringing in the fat profits? And, in fact, will it ever do so?
Those are big questions, and nobody really has any clue about the answers. Meanwhile, Ocado shares have been boosted to levels that I think include way more optimism than is justified.
One day, I think the Ocado share price will inevitably come to reflect the actual value of the company’s income stream. And that, I fear, will require a big downrating. It’s bargepole time for me.