Modular Automation Will Unlock Vast Potential In Digital Grocery

Key Takeaways

• Major automation advances and flexible new models lower costs, expand addressable markets, and position Ocado for margin and revenue growth beyond current expectations.
  
• Strategic shifts and expiring exclusivity enable access to new global partners, accelerating SaaS, royalty, and recurring revenue streams as automation demand surges.
  
• High financial and partnership risks, rising competition, and consumer pressure threaten Ocado's margins, revenue stability, and long-term profitability despite ongoing technology investments.

Catalysts

Operates as an online grocery retailer in the United Kingdom and internationally.

• Analyst consensus sees Ocado's automation technologies as margin accretive, but recent breakthroughs have doubled warehouse capacity while slashing footprint and labor requirements-this fundamentally lowers per-order costs and has the potential to deliver margin expansion far in excess of current forecasts as retailers upgrade at greater scale.
  
• Analysts broadly agree rising OSP module count and partner ramp-up will drive revenue growth, but with exclusivity agreements rolling off, Ocado is positioned to secure multiple major deals in previously inaccessible markets, opening a step-change in SaaS and royalty revenue well above consensus expectations.
  
• Ocado's rapid shift towards modular, flexible automation solutions (including micro-CFCs, side-of-store, and hybrid models) enables entry into a far larger addressable market, accommodating retailers of all sizes and accelerating penetration in both mature and emerging e-commerce geographies, driving sustained top-line growth.
  
• The accelerating global labor squeeze and persistent wage inflation are creating an inflection point for warehouse automation adoption, positioning Ocado to capture an outsized share of new deployments and significantly boost both revenues and pricing power.
  
• Integration of advanced APIs and marketplace fulfillment capabilities makes OSP the backbone for omnichannel and on-demand grocery, deepening client relationships and increasing recurring revenues as demand for speed and convenience reshapes global grocery economics.

Ocado Group Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on Ocado Group compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Ocado Group's revenue will grow by 54.3% annually over the next 3 years.
• Even the bullish analysts are not forecasting that Ocado Group will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate Ocado Group's profit margin will increase from -26.7% to the average GB Consumer Retailing industry of 2.3% in 3 years.
• If Ocado Group's profit margin were to converge on the industry average, you could expect earnings to reach £107.3 million (and earnings per share of £0.13) by about July 2028, up from £-344.9 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 39.8x on those 2028 earnings, up from -8.3x today. This future PE is greater than the current PE for the GB Consumer Retailing industry at 19.0x.
• Analysts expect the number of shares outstanding to grow by 0.57% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.87%, as per the Simply Wall St company report.

Ocado Group Future Earnings Per Share Growth

Risks

• Persistent high interest rates and tightening capital markets have already driven a considerable increase in Ocado's finance costs on new debt, which could further constrain expansion opportunities and put downward pressure on net margins if capital remains expensive or hard to access.
  
• Ocado's business model still requires high levels of recurring R&D and capital expenditure to support technology edge and fulfilment capabilities, and management acknowledges that only sharp cost discipline and lean operations will make the business sustainably cash flow positive, so any return to elevated spend or under-delivery on cost savings would compromise net margins and long-term earnings.
  
• The company's sustained reliance on a small number of major partners, such as Kroger and Marks & Spencer, creates risk that any deterioration in these core relationships or non-renewal of contracts would introduce significant volatility in both revenue and earnings.
  
• With many exclusivity agreements soon rolling off, Ocado faces an increase in competition as global grocery retailers may choose to develop their own automation or partner with rivals, likely reducing future revenue growth and compressing pricing power and margins.
  
• Consumer price sensitivity in a challenging macroeconomic environment and rising service delivery costs, such as higher national and minimum wages, could push partners to renegotiate fees or delay automation investments, impacting Ocado's sales pipeline, top-line revenue, and eventual earnings.

Valuation

• The assumed bullish price target for Ocado Group is £4.0, which is the highest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Ocado Group's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of £4.0, and the most bearish reporting a price target of just £2.1.
  
• In order for you to agree with the bullish analysts, you'd need to believe that by 2028, revenues will be £4.8 billion, earnings will come to £107.3 million, and it would be trading on a PE ratio of 39.8x, assuming you use a discount rate of 7.9%.
  
• Given the current share price of £3.41, the bullish analyst price target of £4.0 is 14.7% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.