Image source: Ocado Group plc
On 27 February, the Ocado Group (LSE:OCDO) share price tumbled 19% after the retailer/technology group announced its results for the 52 weeks ended 1 December (FY24).
Investors seemed unhappy that the group had recorded a bigger-than-expected loss of £374.3m. But despite this, the company remains one of the largest on the FTSE 250. Its shares currently (5 March) change hands for around 230p, giving Ocado a market-cap of just under £2bn.
However, there appears to be some uncertainty about the future direction of the company. Could its shares reach £10? Or is a drop to £1 more likely?
Let’s take a look.
If not quite £10, there’s scope for growth
Although the group has three operating divisions, the biggest growth is likely to come from its Technology Solutions business. Presently, this provides an IT platform to 13 retail partners across the globe.
The Ocado Smart Platform (OSP), which is described as an “end-to-end ecommerce, fulfilment and logistics solution”, uses clever robots and artificial intelligence (AI) to maximise operational efficiencies. As part of the service, the company operates 20 Customer Fulfilment Centres (CFCs) on behalf of its customers.
During FY24, revenue for the business unit was 18.1% higher than for FY23, at £496.5m. And its technology and support costs were 5% lower. Overall, the division’s contribution to overheads was 17.4% more. Also, the group has a pipeline of another 7 CFCs, which should be operational by FY27.
Clearly, things are moving in the right direction although a four-fold increase in the share price seems optimistic to me.
Why I think £1’s more likely
When reporting its numbers, Ocado likes to focus on adjusted EBITDA (earnings before interest, tax, depreciation and amortisation). Indeed, this was £153.3m in FY24, compared to £51.6m for FY23.
But the company has a lot of ‘D’ and ‘A’ (£460.3m in FY24) which means it usually ends up reporting a post-tax loss.
The directors are forecasting a drop in depreciation charges as capital expenditure is to be scaled back. And while this is a non-cash cost, the technology to which it relates will have to be replaced at some point, so it shouldn’t be ignored.
The group’s technology and CFCs are expensive. Net debt increased by 11.6% during the year. At 1 December 2024, it was £1.2bn.
It’s ironic that earnings for the ‘old-fashioned’ part of the group are doing the best. Ocado Retail, its joint venture with Marks & Spencer, is “the fastest-growing grocer in the market” and has 1.1m active shoppers.
Although the group has some innovative solutions, nobody really knows when it’s going to be profitable. The plan is to be cash flow positive in the second half of FY26. But it’s unclear when earnings will move into the black.
And this gives me a problem. Namely, how to value a loss-making company? Potential is all well and good, but what’s it worth?
If I had to choose, I’d predict that a £1 share price is more likely than a £10 one. Of course, nobody knows for sure but I suspect the take-up of OSPs is too slow to turn around the finances of the group before it requires additional funding.
For this reason, I don’t want to buy any of its shares.
