Ocado Short Sellers Circle as Technology Test Looms for Grocer

(Bloomberg) -- A rise of more than 55% in Ocado Group Plc’s shares this year, and increased competition, has put the U.K. online grocer and technology provider back in the sights of bearish speculators.

Short interest in Ocado climbed above 5% of shares outstanding for the first time since July 2018 last month, after touching a multiyear low in late May, according to data compiled by IHS Markit Ltd. Some investors may be betting the shares are pricey enough and won’t be able to reach enough licensing technology deals to sustain its valuation. An official for Ocado declined to comment.

Ocado reports first-half results on Tuesday and analysts will be watching for any further updates on the impact of a blaze at its warehouse in southern England in February, when a robot caught fire, as well as more details about partnerships. The grocery distributor’s first overseas warehouses should open in the next 12 months, providing a further test of Ocado’s technology credentials, Bloomberg Intelligence analyst Charles Allen said on July 1.

Ocado shares have more than quadrupled since announcing a technology licensing deal with France’s Casino Guichard-Perrachon SA in 2017, giving the company a market value of about 8.5 billion pounds ($10.6 billion). Since then, the U.K. grocer has signed similar agreements with Canada’s Sobeys Inc., Sweden’s ICA Gruppen AB, Kroger Co. in the U.S. and Coles Group Ltd. in Australia. The company also formed a joint venture with Marks & Spencer Group Plc in February.

Hatfield, England-based Ocado has long been a stock that has divided analysts, with price targets ranging from 600 pence to 1,700 pence at the close on Friday, according to data compiled by Bloomberg. Jefferies analyst James Grzinic downgraded his recommendation to underperform in a note last month, saying that Ocado’s valuation had reached a point where it assumes significant future wins.

New Entrants

New competitors such as Today Development Partners and Takeoff are emerging threats for Ocado, HSBC analyst Andrew Porteous wrote in a note Friday. In May, British grocer Waitrose Ltd. announced an online partnership with TDP, whose co-founder Jonathan Faiman is also a co-founder of Ocado.

Meanwhile, Citigroup analyst Nick Coulter sees Ocado’s joint venture with M&S, which aims to deliver fresh products to customers within an hour, doubling the company’s addressable market by catering for basket sizes that are below 40 pounds. Coulter raised his price target in a June 21 note to factor in the service.

“We expect Ocado Technology to keep signing deals and invest in interesting new ideas like vertical farming or robotic meal prep technology,” Peel Hunt analyst James Lockyer said in an email. “For us, Ocado Group is a technology group and should be treated as such.”

Ocado’s enterprise value to sales -- a metric sometimes used to value high-growth software companies -- is 5.3, slightly above internet giant Amazon.com Inc. British retailers Tesco Plc and J Sainsbury Plc have ratios of 0.4 and 0.2 respectively.

Any future share gains may depend on whether the U.K. company, which reported a wider loss for last year, can keep reassuring investors about its earnings potential.

“The big deals are not going to see revenue and profit until they go live due to accounting rules,” Lockyer said. “They have been receiving upfront cash for them, so watch out for that.”

To contact the reporter on this story: Lisa Pham in London at lpham14@bloomberg.net

To contact the editors responsible for this story: Beth Mellor at bmellor@bloomberg.net, Jon Menon, Monica Houston-Waesch

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