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Could this online retail stock become a tech giant?

Zaven Boyrazian
·3-min read
Supermarket aisle with empty green trolley
Supermarket aisle with empty green trolley

Thanks to the flexibility and hassle-free experience provided by e-commerce solutions, online retail was responsible for over 21% of annual consumer spending in 2019. According to eMarketer this figure will reach 32% by 2024 as the reliance on online marketplaces like Amazon continues to increase.

While purchasing so-called non-essentials online has seen a sharp increase in the past year, groceries (that once lagged other categories) have seen an even steeper rise.

With a second lockdown in England coming into effect this week, people who are unwilling or unable to visit their local supermarket will have to rely on online grocery shopping solutions. That’s where this growth stock comes into play.

The online retail opportunity

Ocado Group (LSE:OCDO) was once ‘just’ a British online retailer for groceries attempting to transform grocery shopping culture. However, in 2019 it pivoted into something far more complex.

The firm has now become a technology-led, software and robotics platform business, providing a unique end-to-end solution for online groceries.

This shift led to a joint venture with Marks & Spencer, making the business the largest dedicated online grocery retailer in the world.

Here in the UK, it controls a 14% market share that has only expanded since the start of the first lockdown back in March.

Despite this constant expansion and additional partnerships, the quality of service has not deteriorated. As such, Ocado boasts a 99% order accuracy and 95% on-time delivery for over 58,000 products it offers.

These results have been made possible by the company’s innovative Ocado Smart Platform (OSP) and its use of robotics for automation.

Today, Ocado can quickly pick, package, and deliver a wide range of fresh food with minimal staff and minimal waste through its innovative technologies.

However, the real value of these solutions may yet unfold as the management team looks towards future applications of this technology beyond online retail, from general merchandise warehouses to vertical farming and rail yard operations.

The financials

Top line revenue exploded from its £41m in 2015 to over £751m in 2019. That’s an average 107% year-on-year growth over the last five years!

This level of explosive growth is likely the primary contributing reason for similarly explosive growth in the share price of 849% over the same period.

But while existing shareholders have greatly benefited from this level of return, today’s valuation is a little concerning.

Despite the technology leaps achieved and favourable market conditions, the firm remains unprofitable.

The bottom line

The investment required to maintain and expand its competitive advantage means that it could be many years before it becomes a meaningfully profitable business.

However, by using robots and not needing physical stores, this online retailer can eliminate many of the fixed costs that other grocery retailers have.

Would I buy in to a still-loss-making business? Given its existing track record, growth prospects and stellar share price performance, I think this growth stock might be worth the risk, even at its premium stock price.

The post Could this online retail stock become a tech giant? appeared first on The Motley Fool UK.

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Zaven Boyrazian does not own shares in Ocado Group. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Motley Fool UK 2020