Ocado: short shrift
The online supermarket is among the most shorted stocks in London
Any company touting artificial intelligence, big data and robotics should thrill the average trader. Ocado, the UK’s online supermarket, ticks all these boxes. Its distribution centres are filled with specialised “bots” ordered about by specially written algorithms parsing customer data. Yet speculators have increasingly sold its shares short. Despite a healthy jump in earnings in recent years, the market clearly thinks it will need more money soon.
Ocado has the second-largest proportion of short positions in the UK market — 18 per cent of issued shares, according to the Financial Conduct Authority. Although that proportion has been higher, the short selling has resumed since the turn of the year. Bears proffer a number of theories on Ocado. Two key ones are that it will never make any money partly because of the threat from margin-killer Amazon. Another reason: Ocado has repeatedly promised it could license its AI, robotics-driven distribution systems to other supermarkets internationally. To date it has failed to do so.
To all this supporters say: so what? Trading volumes have consistently climbed at a rate in the low teens, as Tuesday’s trading statement reiterated. Operating profits have quadrupled since 2012 and free cash flow turned positive two years ago, although not if one includes the costs of software licenses. And that may be the rub. The company does still leak cash, a lot less than years ago but still some. Meanwhile, Amazon Fresh has arrived in the UK delivering to just over 200 postcode areas. A company with plenty of pre-paid customers (Prime) and cash could do a lot of damage to the supermarket sector. On the other hand Amazon could leapfrog its development time by buying Ocado.
The fact that its shares have travelled nowhere over nearly four years suggests Ocado’s chances are slim. Yet any good news would send shorts scurrying to buy back. Its 4 per cent rally on Tuesday may be telling. Only robots stick blindly to their scripts.