Ocado in good shape to keep on expanding

OCADO’S retail revenue shot up just over 40 per cent in the second quarter to date, compared to last year.

That’s being driven by the UK’s huge appetite for online groceries as the country adapts to life in lockdown. In fact, so desperate is the nation for doorstep deliveries that demand is far outstripping supply.

As a digital-only supermarket, Ocado is in prime position to benefit.

Ocado’s sales should start to even out in the fullness of time. In fact, in last week’s trading statement, the group said shopping habits were returning to more normal levels.

While coronavirus is a short-term tailwind for Ocado, the attention should really be on the Solutions business, especially as 50 per cent of the retail operation has been sold to Marks & Spencer. Solutions is where other retailers pay to use Ocado’s robotic systems.

We think this is a good place to be because we expect coronavirus has triggered a longer-term increase in online groceries. Households that may have never considered buying their weekly shop on a website will now be accustomed to the service.

That should see other supermarkets scurry to improve their own online offering.

However, a severe economic downturn could cause supermarket chains to hold off on multimillionpound digital expansion, making it harder for Ocado to strike up new partnerships. How that pans out depends on the extent of the damage on the economy.

Hatching more deals is important for Ocado because it currently trades on a valuation much higher than its average, meaning the shares could fall if growth disappoints.

Investors can’t expect to see meaningful profits or dividends for a while yet either.

There’s a lot up in the air for Ocado, and plenty of pressure for things to go well. But we still think it’s in a reasonably good position.

“This article is designed for investors who make their own decisions without advice. If unsure whether an investment is right for you, you should seek advice. Shares can rise and fall in value so you could get back less than you invest.”