Ocado does business in the most competitive field, groceries. It competes with traditional mom and pop stores, huge chains (Tesco, Sainsbury's) and discount supermarkets (Aldi, Lidl). In addition, almost all supermarket stores in UK maintain an online presence, either through store pickup or direct house delivery. Tesco, ASDA and Sainsbury's websites all rank ahead of Ocado in terms of traffic (according to Alexa).
Let's take a look at Ocado's financials:
Ocado has not yet shown a profit since it's start, and although EBITDA margins are improving, one of the reasons is a huge increase in other income (from 2.6 mil. in 2009 to 23 mil. now):
Other income comprises the fair value of consideration received or receivable for advertising services provided by Ocado to suppliers and other third parties on the Webshop, commission income, rental income, sublease
payments receivable and amounts receivable not in the ordinary course of business. (Source: Annual report)
If I take other income out and consider only it's grocery business, the EBITDA for 2013 is only 22.7 million with a margin of 2.86%, lower than 3% recorded in 2010.
Let's take a look at Ocado's market value compared to it's competitors:
I have done a three-stage DCF valuation based on these assumptions:
- OCDO will grow by 15% in the next 5 years
- growth will slow down to 7.5% for years 6-10 (2nd phase)
- terminal growth rate of 2% indefinitely
- they are expected to grow revenues to 1.14 billion in 2015
- a miracle will happen and they will show of profit of 34.3 million next year (3% margin, still quite high)
I think Ocado is not going to show a reasonable profit anytime soon and it's future growth (if any) is not high enough to justify the valuation. Therefore, I'm initiating a short position in OCDO.