Ocado’s share price up 42% as legal row comes to an end

Ocado’s share price has finally started to deliver again. The stock is up 53% over the past month, and bagged a 42% gain last week, closing Friday 28 July at 976.4p. The end of a long-running legal row and takeover rumours have helped boost faith in the stock. However, it remains far off from its pandemic-era highs.

• Ocado’s share price soars after settling long-running lawsuit with AutoStore.
• First half losses widen to £212m, but revenue up across business.
• Amazon takeover talks boost sentiment, but no firm proof it will actually happen.

Ocado’s [OCDO.L] share price soared last week after announcing Norwegian rival AutoStore would pay it  a £200m settlement to end a long-running legal row. 

In 2020 AutoStore, which provides robotic ecommerce technology, claimed Ocado had infringed its intellectual property. Numerous litigation battles in several countries followed as the companies sought  to defend their respective intellectual property.  

Under the terms of the settlement both parties will withdraw their patent litigation claims and be able to use their existing products without challenge.

Ocado’s share price closed 42% higher last week, continuing a rally that began in early June.

Ocado’s share price gains on takeover talk

Between the start of the year and 5 June, Ocado’s share price had tanked over 44% on mounting losses. During this time, the online grocer narrowly avoided being booted out of the FTSE 100.

Since that point in June, Ocado shares have gained over 172%, partly due to rumours that Amazon [AMZN] is to be considering offering 800p a share to takeover the online grocer.

Ocado could be a good target for Amazon, which has struggled to enter the online grocery market. Nevertheless, there has been no firm evidence that a deal is actively being considered. GlobalData lead retail analyst Nick Gladding points out that a “Ocado–Amazon tie-up has been talked about for years”. 

Revenue increases for Ocado in H1

Despite the recent gains, Ocado’s share price is far off its pandemic-era highs where it once traded at 2,914p in late September 2020. Driving up the share price was a surge in business as stuck at home shoppers turned to online grocers for their weekly shopping. 

However, in the last couple of years, Ocado’s losses have mounted as it has been heavily investing in its ‘solutions’ business which builds high-tech robotic fulfilment centres for international clients.  In 2022 this side of Ocado’s business made a £113.2m pre-tax loss. The previous year it lost an eye-watering £119.3m. 

The losses have continued in the first half of 2023, but there are signs of growth with Ocado’s revenue growing 8.6% to £1.4bn. 

In half-year results published 18 July,  Ocado’s pre-tax losses after expectations were £289m, up from £211m for the same period last year. But despite the losses, revenue for its solutions business rose 58.9% to £198.2m, with a slim EBITDA of £6m turning around a £59m loss in the same period last year.

Ocado’s retail business co-owned with M&S [MKS.L] delivered a £2.5m loss over the period, although the company pointed out that it had been positive on an EBITDA basis in the second quarter. Retail sales for the half year rose 5% to £1.2bn, with higher prices offsetting small basket sizes. 

Where next for Ocado’s share price?

Growing revenues and settling legal woes have helped Ocado’s share price, as have unfounded takeover talks. The solutions business’s positive EBITDA is a welcome development, but investors should dig into Ocado’s still heavy losses.

In a July research note, Berenberg said they were unable to provide an equity recommendation for Ocado due to “very low financial visibility”. The Berenberg analysts added that Ocado’s retail business had not been a “bastion of steady progress”, while there was “no credible” model for the solutions side of the business where “so much has been invested for such material accumulated losses”. 

As for the Amazon rumours, the analysts described these as “spoof” stories. Had a bid or an approach been made, the UK Takeover Panel would have asked for clarification given Ocado’s share price movement.

Ocado’s share price has a 680p 12-month median price target, suggesting a 30.4% downside on Friday’s close.