I bet those who invested in Ocado Group (LSE: OCDO) at the start of 2020 are smiling as they look at how well they’ve done. Approaching Christmas, the Ocado share price has climbed 80%. That’s a cracking result for any year. And it looks a little bit sweeter compared to the FTSE 100‘s fall of 15%.
Ocado shares have been even higher during the year, topping out with a 125% gain in September before dropping back. But why have investors elevated a simple online supermarket to such high levels? And can the outperformance continue?
The most recent Kantar figures give Ocado just 1.7% of the UK’s groceries market. It’s in last place, below ‘Other outlets’. By contrast, market leader Tesco commands 27% of the market. A look at the relative valuations of the two companies reveals something rather alarming. Tesco currently has a market capitalisation of approximately £21.7bn, while Ocado comes in at £17.5bn. Despite Ocado having only around 6% of Tesco’s market share, investors rate it at 80% of Tesco’s valuation. The market is clearly not valuing Ocado shares as simple supermarket stocks.
Ocado’s tie-up with Marks & Spencer does appear to be going well. In the company’s last update, on 10 December, we heard of “continued positive customer response to [the] M&S offering.” Retail revenue grew by 35%, with customer orders averaging £133 in value. But we won’t see any actual profit from that any time soon. You know what profit is, the lifeblood of successful companies, and the stuff that Tesco brings in mountains of every year.
It’s all about seeing Ocado as a supplier of online shopping technology and expertise. Ocado has already provided the know-how to get a number of worldwide operations under way, and investors clearly hope for more of that to come. But the big question for me is whether there really is the market in online retailing technology to justify today’s Ocado share price.
Ocado share price valuation
Analysts expect Ocado to record a loss per share of around 20p this year, with a bigger loss of 22p on the cards for 2021. So trying to think of any kind of P/E valuation right now is a non-starter. And of course, there’s nothing approaching a dividend likely to come any time soon. I reckon guessing at a fair Ocado share price can only really be done by elevating fingers into the atmosphere. And my finger would pluck out something a lot lower than the actual price.
But what about all that shopping technology potential? Well, plenty of others around the globe have got the market well understood. Tesco has far more experience of getting goods actually off the shelves and delivered. And there are many other companies doing online selling in vastly greater volumes than Ocado can hope. Amazon springs to mind as a world leader.
The Ocado share price has done far better than I could have expected in 2020. But I really do think it’s seriously over-inflated now. I won’t go near it in 2021.
The post The Ocado share price has beaten the FTSE 100 hands down in 2020 appeared first on The Motley Fool UK.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Amazon. The Motley Fool UK has recommended Tesco and recommends the following options: long January 2022 $1920 calls on Amazon and short January 2022 $1940 calls on Amazon. 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