I think it is fair to say that over the past 24 months, online retailer and technology group Ocado (LON:) (LSE: OCDO) has proven all of its doubters wrong.
After doing nothing for many years, at the end of 2017, the stock suddenly started to move higher, and it hasn’t stopped since. A stream of technology deals and agreements with major retailers have sent shares in the business surging higher, and any investors who bought at the beginning of April 2017 are now sitting on gains of nearly 460%.
A similar investment in the has returned less than 5% excluding dividends.
The big question is, after this staggering performance can the Ocado share price keep rising or is it time to take profits from this market-beating performance?
Reach for the stars
It is pretty easy to see why shares in Ocado have taken off over the past 24 months. After years of refining its operations and struggling to achieve any sort of growth, since the beginning of 2017, there has been a rush of retailers wanting to get a piece of the company’s technology.
Management has signed deal after deal with companies all over the world that now have the rights to use Ocado’s technology when developing their own customer fulfilment centres.
The latest of these deals is a partnership between Ocado and Australian retail giant Coles. The latter has brought Ocado in to help it develop robotic distribution centres in Sydney and Melbourne. The wording of the deal suggests this could be just the start of a much larger and expansive collaboration between the two companies.
Where’s the money?
However, while these deals might imply that Ocado is well on its way to becoming a global retail behemoth, at this point, it is difficult to assess the group’s long-term potential.
Most of the deals Ocado has unveiled have not provided shareholders with detailed financials, which doesn’t seem to have held the shares back, but unless we get some concrete figures soon, investors might start to lose confidence in business. Indeed, based on current numbers, it is difficult to justify the current share price. Analysts are not expecting the group to report a profit for the next two years, even though revenues are projected to increase by around 30% to £2.1bn.
After the stock’s recent performance, Ocado has a market capitalisation of £9.6bn, which seems to me to be extremely expensive considering this company is not profitable.
A valuation of nearly £10bn seems outrageous no matter how you look at it. Investors are being asked to pay a very high premium for no profits today, but the promise of earnings in future. I don’t think this is a risk worth taking personally. As the company is not yet profitable, it is impossible to place a value on the shares, and with this being the case, I am sceptical that the stock can continue rising.
So, overall, I think it might be worth taking some profits after the recent rally and for investors who are looking to buy in, I reckon it might be worth waiting for a better entry point.
Rupert Hargreaves owns no share mentioned. 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 2019
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