Automated Fulfilment Will Offer Upside Amid Margin Risks

Key Takeaways

• Overestimated international licensing and automation demand, along with rising competition, could limit Ocado's revenue growth, margin expansion, and cash generation.
  
• Persistent R&D costs and evolving market risks may constrain profitability, while competitive pressures and regulatory challenges threaten valuation and long-term growth.
  
• Ocado's focus on automation, global partnerships, and a shift to recurring revenue models strengthens profitability prospects and competitive positioning in the expanding online grocery market.

Catalysts

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

• The market may be overpricing Ocado's ability to sustain and expand its high-margin, recurring revenue growth from international licensing as exclusivity agreements roll off; with the imminent shift to a multi-client environment, intensified competition and slower-than-expected customer adoption could dampen anticipated revenue growth and cash generation.
  
• Expectations of sustained demand for large-scale automated fulfilment solutions may be too optimistic as labor cost advantages diminish in certain markets and potential clients increasingly opt for lower-cost/hybrid automation or in-house solutions, pressuring Ocado's margin expansion and capital returns.
  
• Despite operational efficiencies and cost savings, the belief that Ocado will rapidly achieve and maintain long-term profitability may overlook ongoing fixed R&D and technology spending requirements, especially as customization for new geographies and product variants increases, risking weaker net margins and lower earnings than modeled.
  
• The assumption that the global online grocery market will continue its accelerated trajectory may not fully account for macro risks such as regulatory headwinds (data privacy, sustainability mandates), changing consumer behavior, and the possibility of a plateau in home delivery demand, constraining long-run addressable markets and revenue upside.
  
• Valuation may be detached from Ocado's competitive realities, with investors underestimating margin pressure and customer churn risks as larger grocers increasingly adopt in-house or competitor solutions, compressing contract values, elevating customer acquisition costs, and ultimately weighing on top-line and bottom-line growth.

Ocado Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Ocado Group's revenue will grow by 49.4% annually over the next 3 years.
• 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 £97.3 million (and earnings per share of £0.11) by about July 2028, up from £-344.9 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 32.9x 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

• Accelerated global adoption of online grocery shopping and rising demand for automated fulfilment solutions position Ocado as a critical enabler for retailers, supporting significant top-line growth and revenue visibility due to strong secular market tailwinds.
  
• Ocado's expanding Technology Solutions business is experiencing robust double-digit recurring revenue growth, driven by increased partner volumes across its platform and successful international deployments-suggesting underlying momentum that may drive future earnings and margin expansion.
  
• The transition to a more disciplined, cash-flow-positive, and asset-light business model-with recurring service revenues, reduced CapEx, and improved cost control-enhances financial flexibility, improves net margins, and supports a path toward sustainable profitability.
  
• Rolling off partner exclusivity agreements opens the opportunity for Ocado to significantly expand its addressable market, pursue multi-client deals in key geographies, and leverage its operational expertise-potentially driving an increase in pipeline, contract wins, and long-term recurring revenues.
  
• Continuous investments in proprietary automation, robotics, and AI have resulted in marked improvements in productivity, site utilization, and client satisfaction, differentiating Ocado's solutions and increasing its competitiveness-supporting future revenue growth and greater operational leverage.

Valuation

• The analysts have a consensus price target of £2.997 for Ocado Group based on their expectations of its future earnings growth, profit margins and other risk factors. 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 analyst's consensus, you'd need to believe that by 2028, revenues will be £4.3 billion, earnings will come to £97.3 million, and it would be trading on a PE ratio of 32.9x, assuming you use a discount rate of 7.9%.
  
• Given the current share price of £3.41, the analyst price target of £3.0 is 13.8% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• 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.