Shares in struggling UK online grocer Ocado (OCDO) have jumped 15.8% after the company announced a reduction in interim losses and a welcome boost from its key technology division.

Ocado's pre-tax losses reached £154 million for the six months to June 2, the company said today, a steep reduction on last year's huge loss of £290 million.

The online grocer also posted six-month revenue of £1.54 billion, driven by what it said was a 21.8% jump in demand for its technology solutions business, which provides robots and software to retailers looking to better their own ecommerce operations.

The boost comes days after the broker Bernstein downgraded the company's shares, a move that itself triggered a share price slump of 12%. Year to date, the shares are still down 48.7%, however, a far cry from its lofty performance in February 2021, when shares were trading at around £28 in the midst of the pandemic. Over the three- and five-year period to July 16 2024, shares have fallen 81.14% and 70.83%, respectively.

Last month Ocado was booted off the FTSE 100.

Key Morningstar Metrics For Ocado

• Morningstar Fair Value Estimate: £9.20
• Morningstar Star Rating: ★★★★★
• Morningstar Economic Moat Rating: None
• Morningstar Uncertainty Rating: Very High

Why Have Ocado Shares Been Struggling?

Twin headwinds of a cost-of-living crisis and a return to "normal" shopping have weighed on Ocado's prospects.

After peaking at 14% of all shopping activity in 2021, online ordering has since reverted to its pre-pandemic norms of 11% of the market. But Ocado has also been slow to make good on proposed business deals. Indeed, it hasn't yet agreed a final payment for the 50% stake of Ocado Retail it sold to Marks & Spencer. The companies' ensuing legal battle is ongoing.

M&S is adamant it should not pay the remaining £190 million it originally owed. In addition, US supermarket chain Kroger has decided to close three stores powered by Ocado's technology.

Ocado Shares Undervalued?

"Ocado Group reported fiscal 2024 half-year results, with revenue up 12.6% and its adjusted EBITDA reaching £71.2 million ahead of expectations," writes Morningstar director of research Ioannis Pontikis in a note today.

"Ocado Retail's performance was driven by customer growth, an increase in average orders per week, and the average basket value increasing by 1.8%. Profitability was also EBITDA-positive at £20.7 million with progress expected to be driven by efficiencies and operational leverage toward a mid-single-digit EBITDA margin in the midterm."

Pontikis maintains that Ocado is undervalued, assigning the company a 5-Star rating, driven by its technology division, and more specifically the Ocado Smart Platform, which has contributed to the firm’s recent share price bump.

"Technology Solutions revenue jumped 21.8% and one new customer fulfilment centre has gone live. 26 sites are now up and running with management reporting EBITDA of £35 million," he continues.

"Our constructive view on the stock is supported by our thesis that the Ocado Smart Platform is a leading provider of online grocery fulfilment solutions for large brick-and-mortar grocers, especially as online penetration grows in developed markets."

Ocado now expects its underlying group cash outflow to improve by about £150 million from £100 million due to lower capital expenditure.

The business also has £300 million in credit lines at its disposal to fund growth until it starts to generate organic positive free cash flow.

Pontikis also argues global opportunities and future tie-ups justify Ocado's Fair Value Estimate of £9.20.

"Our valuation reflects online penetration rising to 25% by 2040 in developed economies with Ocado's solutions capturing a high single-digit market share in these digital grocery markets through Ocado's partners," he says.