The Ocado (LSE: OCDO) share price climbed 8% in early trading on 26 March. That’s down to a Q1 trading update from Ocado Retail, the joint venture with Marks & Spencer.
Volumes grew by 8.1% year on year, with retail revenue up 10.6%. And the firm’s market share rose by 0.7% to 13.5%.
The growth came mainly from a rise in weekly orders, up 8.4% on the same quarter a year ago. The average basket value rose by 2.1%.
Price competition
One headline item stands out to me and sounds a note of caution.
The firm talked of a “continued focus on pricing strategy [that] resulted in ASP (average selling price) growth of just 2.2%, significantly below the market.”
So, selling prices rose by a fair bit less than inflation. And Ocado improved its revenues by lowering prices in real terms.
That higlights the main concern I’ve always had about Ocado Retail. At the end of the day, it just sells groceries — and that’s always been a firecely price-competitive market.
I don’t care if my shopping is delivered using state-of-the-art warehousing and delivery technology — I just want the lowest prices possible.
When will we see profit?
While rising revenue is good, I need to see it translate into sustainable profits. Only then will I be able to try to put a fair valuation on Ocado shares.
And I think a look at what’s happened to the Ocado share price over its lifetime so far shows that nobody has really had much clue how to value the stock.
FY 2023
Ocado did post a profit for the 2023 full year. Well, sort of, at least on an adjusted EBITDA basis. That figure came in at £51.6m, which is a lot better than the previous year’s £74.1m loss.
But it’s tiny for a firm with £2.8bn annual revenue. And it still led to a reported loss before tax of £394m. Ouch! And we saw an underlying cash outflow of £473m. Eek!
It’s perhaps unfair to compare it to Tesco, with its far larger revenues. But Tesco generates strong cash flow, recorded growing earnings per share in its first half, and even pays dividends.
Will it come good?
Ocado has been a serial disappointer so far. But, I am convinced it will come good some time. And investors who buy the shares at what turns out to be a good price could profit nicely.
I just have no idea when that will be, or how to decide if the shares are cheap now.
I know I’m ignoring the technology side of the business, which Ocado is selling to all sorts of big retailers round the world. And 2023 saw growth in sales, growing partnerships, and rising numbers of sites powered by Ocado.
But that only adds to my confusion.
A buy for me?
Ocado shares look too expensive for a souped-up supermarket. But they might be cheap for a tech firm that could power much of the world’s online groceries market.
When I have any way to tell, I might buy some.
