Ocado Group (LSE:OCDO), the FTSE 250 online grocer, has a stock market valuation of £2.55bn (31 January). Admittedly, this is a lot lower than it has been. The company’s share price has fallen 75% since February 2020.
However, it’s still 17% higher than Greggs (LSE:GRG), the baker. Investors value the pie and sausage roll maker at £2.18bn.
What’s going on?
This differential is baffling to me.
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That’s because, during the year ended 30 November 2023 (FY23), Ocado disclosed a loss after tax of £393.6m.
In fact, from FY19-FY23, it reported accumulated pre-tax losses of £1.34bn!
And analysts aren’t expecting this to change any time soon. The consensus forecast over the next three financial years is for losses of £330m (FY24), £303m (FY25), and £222m (FY26).
If these estimates prove to be correct, it’ll have racked-up losses equivalent to Greggs’ current market cap in just eight years! In my view, this is a poor performance for a company that’s been in existence since 2000.
On the other hand
In contrast, Greggs has made a total profit of £556.2m over its past five financial years. Remember, this period includes the pandemic, when many of its stores had to close and Ocado benefitted from the boom in online shopping.
However, a company’s share price is supposed to reflect the future prospects of that particular business. To paraphrase Warren Buffett, if history was all that matters when it comes to investing, every librarian would be a millionaire!
There are many examples of loss-making technology companies that attract generous valuations. And this probably explains why Ocado is valued so highly.
Its use of clever robots in its distribution centres and innovative delivery scheduling software sets it apart from some more traditional companies. The group’s most recent accounts (2 June 2024) value its non-current assets at nearly £3bn. It sees great potential from licensing these to third parties.
But at the moment, it generates the majority of its revenue — 68% during the 53 weeks ended 3 December 2023 — from the sale of groceries. And that’s not cutting edge.
In common with the analysts, I don’t see an immediate path to profitability, which concerns me.
Yes, Greggs is much more old-fashioned. But it’s profitable and growing.
And it pays a dividend, although they’ve been erratic in recent years. Based on its payouts over the past 12 months, the stock is current yielding 4.1%. Of course, dividends are never guaranteed.
Ocado has never returned any money to shareholders.
Other opportunities
But despite favouring the baker over the online grocer, I won’t be investing.
Its pace of growth is slowing, which has recently spooked investors and led to its share price coming under pressure. Although this fall could be an attractive entry point for me, I think it reflects wider concerns that investors have about the company, ones that I share.
The group’s totally reliant on a UK economy that’s showing signs of weakening, despite the best efforts of the Chancellor to stimulate growth. In my opinion, the impact of the rise in employer’s national insurance will disproportionately increase the cost of employing lower-paid workers. This will affect all retailers, including Greggs.
