A huge number of short bets on Ocado went horribly wrong this morning

Ocado stock popped up 7% this morning after the company reported stronger than expected sales. This is good news for the company, and good news for people (like me) who own Ocado shares.

It is also a revenge on the shorts.

Ocado bulls have suffered the stock’s decline from its peak at 600p back in 2014 to the bottom at 232p in February this year. Ocado was beaten down by news that Amazon would begin grocery delivery in the UK and notes from analysts like the crew at HSBC who believe — not making this up — that the internet will not turn out to be a big deal when it comes to online supermarket shopping.

So today’s beat was a welcome development.

Even better, it looks like a lot of people in The City are going to lose money due to Ocado’s good fortune. Reuters reported on March 10 that short interest in Ocado hit a record high, at 23.1% of its stock on loan.

People who “short” stock are basically betting that the stock will fall. Their theory is basically that Amazon will wipe the floor with Ocado, that Morrisons is pulling out of its deal with Ocado, and that all the other supermarkets are going to go online and run competing online delivery operations.

The one thing everyone forgets is that online grocery delivery is a lot harder than it looks. The logistics are mind-bogglingly complicated. So complicated, in fact, that Ocado has programmed a bunch of robots to run its warehouses rather than rely on humans to pick goods off shelves.

Here is just one counter-intuitive example of why this business is so hard: Most people assume that the best place to launch this type of business is a city like London, where customers are dense. But it can be more efficient for Ocado to deliver in the ‘burbs because traffic is easier, there is better parking near customers’ houses, and the bags don’t need to be dragged up flights of stairs or go into lifts to be delivered.

Even though customer deliveries may be physically closer to each other in London, it can be quicker to get them delivered in the suburbs for this reason. (Amazon, naturally, launched its Amazon Pantry offering in London. Ocado, meanwhile, is expanding West, opening a new customer fulfillment centre in Andover.)

And then there are the analysts. Ocado has suffered in large part because many of the analysts covering it are retail or supermarkets experts and not tech stock analysts. That’s why you get notes from the retail crew at HSBC who write things like: “We remain unconvinced of long-term viability of home deliveries for grocery.”

Those guys are wrong. Ocado isn’t a supermarket. It’s a tech company. It’s a mature startup that has a great mobile app and a bunch of robots that it can licence anywhere on the planet. That explains why Ocado sales were up 15.3% today when Sainsbury’s notched only a 0.1% increase on the same day. Haters gonna hate, but Ocado just keep chugging along, growing revenues quarter after quarter.

Here is the most interesting stat I saw in today’s release:

  • February 2015: 214,000 orders per week
  • September 2010: 92,834 orders per week

Basically, shoppers have doubled the amount of weekly business they’re doing with Ocado in the last six years. And Ocado isn’t even available in large parts of the UK yet. The shorts are betting against growth. Good luck with that.

Disclosure: The author owns Ocado stock.

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