Zak Mir – Ocado – The Bear Destroyer

CNBC Europe was this morning graced with the presence of online grocer CEO and bear trader destroyer Tim Steiner. In fact, I would maintain that he has been far more effective at the latter than the former in recent months! All the usual themes were discussed in the interview  – the deal with  Morrison’s (MRW), the special relationship with Waitrose and of course the ‘P’ word – profits. The cutting question was of course, after 13 years – when will there finally be a profit?

Mr Steiner retorted  that businesses will very often sacrifice short term small financial gain  in favour of investing for the future and larger riches (yes, that old chestnut!). On this basis, the decade long wait for glory would imply that we could see profits on a Tesco (TSCO) like scale by say…2300!. But, there was another issue in focus, that of the market perhaps not understanding the business (another old chestnut), especially all those sad people (and now considerably poorer) who viewed the stock as a short over the past year.

They could have be forgiven for this, given that as recently as November only last year, there was the risk that Ocado could have breached its banking covenants. Therefore, part of the bear squeeze here from the autumn was people licking  their lips at the prospect of us having another HMV or a JJB Sports panning out. But, there is apparently another aspect in play here, the mystery regarding the business model. The cynic would suggest, as did the interviewer, that we are not talking about anything more complicated than shoving groceries in a van and taking it to someone’s address. But, the point that was not discussed, and remains key as far as any bears remaining out there, is the cost of delivery and whether given the cut throat margins in the supermarket space this was ever a goer even with all the fancy logistical technology, specially designed warehouses and the like?

Clearly, this margin argument has been partially answered by  the Morrison deal, both in terms of the £200m taken in by Ocado off the back of this tie up, but also the way that the business only makes sense as an add on to an existing traditional supermarket.

Looking at the daily chart of Ocado, if you are someone who  regards the share price as being a valid indicator of prospective value that the business will in fact prosper – contrary to many’s expectation and of course why the shares have spurted dramatically in recent months. Here we see an ongoing recovery from the  dark days of the autumn via an exponential style recovery. The idea that there could be further upside here is backed by the late June rebound off a March price channel floor at 270p only 2 weeks ago.  Indeed, the upside at the top of this channel is implied to be 400p. Not bad for a company which has taken over a decade to get into the black, and whose profits will be appearing “very soon.”