Ocado is set to leave the FTSE 100 following a drop in its share price, piling further shareholder pressure on the business to consider ditching the London Stock Exchange for New York.
The grocery giant will exit the index during a quarterly reshuffle, after its valuation fell from a £22bn high in the pandemic to £3.1bn.
Shore Capital vice chairman Dr Clive Black brands the cataclysmic surge in the online grocery firm’s shares during Covid as “irrational” as shoppers were always going to return to stores.
“Ocado’s share price irrationally rose in the stock market nonsense of 2020 when certain investors thought we would never go back to stores, which was nonsense, but Ocado did a good job feeding the frenzy,” he says.
“The group’s financial performance since then has been dire and so combined, pandemic normalisation and substantial losses, which little prospect of attractive profits this decade explain the dose of reality.”
Other reasons behind Ocado’s share price collapse include Amazon launching third party deals with supermarkets Iceland, Co-op and Morrisons in recent years, which creates more competition to the online retailer.
Competition across the board has ramped up for Ocado, with most UK grocers now delivering direct to consumers’ houses not just through their own online services but speedy tie-ups with the likes of Deliveroo and Just Eat.
Meanwhile, HSBC Investment Bank director Paul Rossington notes there has been an absence of new technology solution wins.
The group, which provides online grocery tech, including its robot-operated fulfilment centres, for international retailers including US giant Kroger, Australia’s Coles and Japan’s Aeon, last signed a grocery tech deal in November 2022 when it partnered with South Korea’s Lotte.
Meanwhile, Rossington points out there has been “no new news” on non-food contract wins since it inked its first tie-up outside of grocery with healthcare business McKesson Canada in November last year.
At the time, Ocado Group CEO Tim Steiner said the tie up was a “new and exciting milestone” as we bring the amazing benefits of Ocado’s technology to the healthcare distribution and logistics sector.
“Our technology is ideally suited to supply chains that require dense storage, highly accurate inventory management and secure stock control.
“lt has been proven over 20 years in one of the most complex supply chain environments, online grocery, and we’re now bringing our experience and IP to more sectors.”
Excited investors have been waiting with baited breath for more non-grocery expansion but more than six months later nothing has transpired.
Meanwhile, Rossington points out there are concerns in the investment community about the cost of refinancing a £600m convertible bond that matures in November 2025.
Elsewhere, its dispute over the final contingent payment for the Ocado Retail joint venture with M&S is rumbling on with the high street retailer insisting it had “not seen evidence” for making the payment late last month.
M&S chief executive Stuart Machin said the “binary” performance-based payment was not met.
“For us, it’s pretty clear we continue to rate the accounting value as zero,” he said.
So, what is Ocado worth?
Black says it’s hard to say what Ocado’s is really worth is, he adds that “on most metrics as a loss making business for 24 years,” it is not worth a lot.
He points out: “The firm has had to raise cash to survive twice and it cannot be ruled out again.”
Rossington notes that the bank has a target price of 285p, which is equivalent to a market capitalisation of £2.975bn, below the online firm’s current £3.1bn valuation.
Of course, Ocado shareholders believe the business should be valued on the future growth potential for the tech specialist, which stands to benefit as more businesses turn to it to help them to win online.
However, as Rossington points out, the lack of new contract wins is making this longer term vision somewhat blurry.
What’s next for Ocado?
Being booted off the FTSE 100 can be a heavy blow for businesses, potentially harming their reputation with investors and attracting unfavourable reporting.
Shore Capital director Dr Clive Black says the exit would lead to more downward pressure for Ocado as tracker funds with stock weightings in that index would sell their shares.
However, he believes it is “is symptomatic of the share price’s dramatic fall from grace, with the tech enthusiasts losing their nerve”.
He explains: “The bears have always focused on the lack of profits and cash flow, but the bull argument was that there would be more lucrative International licensing deals and Ocado seem to have gone a bit quiet on that front.”
The retailer’s recent decline in share price has led to speculation it is considering switching London for New York, where its valuation could be higher.
Last month, The Telegraph reported face-to-face discussions had been held with investors over recent weeks, where the idea of Ocado moving its listing to America was spoken about in detail.
Speaking to the publication in March, strategy consultant Brittain Ladd said: “I would strongly encourage Ocado to list in the US.
“That would certainly help Ocado unlock capital. However, the key is for Ocado to articulate a strategy of how they will use their platform.”
However, Bubb says: “There is some evidence that some of the big international clients like Kroger in the US are not finding online grocery shopping that easy to make work.
“Having said all that, the shares look due a rally, given the US listing rumour – which sounds sensible – but we will see.”
Black is more cynical: “Ocado could explore New York but US investors are not stupid, the losses will persist and management could come under greater pressure to deliver…look at Cazoo,” he says referencing the secondhand car platform, which crashed into administration last month, just three years after its $8bn (£6.4bn) New York IPO.
Things may not be rosier on the other side of the pond.
If Ocado wants to reclaim its position among the stock market elite, it will need to strike some more technology deals and prove to investors that its growth potential can become a reality.
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