Here’s why the Ocado share price scares me and why I’m steering clear

Online grocery retailer Ocado plc (LON:OCDO) has had a storming 2018 so far, but this Fool isn’t tempted.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

To say that the last six months have been eventful for Hatfield-based online grocery retailer Ocado (LSE: OCDO) is something of an understatement.

In only a short period of time, the company has gone from being one of the most hated stocks on the market to entering the FTSE 100. The reason? A series of partnerships with some of the world’s biggest retailers to use its software and “robotic infrastructure solutions” — the most recent being US giant Kroger and summarised here by my colleague Roland Head.

Had you invested in Ocado one year ago, you would have multiplied your capital by more than 250%.

But hindsight is wonderful. The question is whether the shares might still be worth buying. I don’t think they are.


Today’s interim numbers were something of a mixed bag. Total revenue rose 12.1% in the 26 weeks to 3 June, coming in at just under £800m. The vast proportion of this (£736.6m) came from its retail business — up 11.7% despite the severe weather experienced in March. This significantly outpaced the 2.3% sales growth achieved by the UK market in general.

Thanks to huge amounts of investment however, group EBITDA fell from £45.2m to £38.9m in H1. The company also recorded a pre-tax loss of £9m — a big contrast to the £7.7m profit achieved one year ago.

As far as its outlook is concerned, Ocado estimated revenue growth of between 10%-15% in the current financial year, barring any economic shocks. Retail earnings are expected to “improve significantly” in H2 due to lower engineering costs, but further investment in its platform means that earnings at its Solutions arm (which reported £63.3m in revenue) are forecast to decline further. 

Ocado’s share price was fairly volatile in early trading, suggesting that at least some market participants felt it was time to bank profit. I don’t blame them.

Crazy valuation

Sure, with its ambition to “change the way the world shops“, the possibility that its platform may become the go-to option for online grocery retailing is an enticing narrative for growth-focused investors.

Raising money to fund ongoing investment doesn’t seem to be a problem either. Thanks to recent deals and placings, Ocado had almost £450m in cash at the start of June compared to just £37.8m in 2017.

No, for me, Ocado’s biggest weakness is simply its valuation. With a market cap already close to £7bn, I strongly suspect it will struggle to reward investors in the way some expect. Increases in revenue might eventually translate into profits but, with most of the partnerships still to be fully operationalised, the execution risk remains substantial.

Trying to predict the direction of the share price over the very short term is fruitless. Moreover, it’s out of line with the Foolish philosophy of buying quality companies at reasonable prices and holding for years rather than weeks.

If you believe that Ocado can deliver on its many promises — which includes attracting more retailers to its platform “over the medium term” — then I can understand the desire to hold the stock.

For me however, the weight of expectation is likely to prove too much. Should the company underperform even slightly, you can expect momentum-hugging investors to sprint for the exits.

In what appears to be an increasingly skittish market, that’s not a risk I’m prepared to take.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

Here’s how I’d aim for a ton of passive income from £20k in an ISA

To get the best passive income from an ISA, I think we need to balance risk with the potential rewards.…

Read more »

Abstract bull climbing indicators on stock chart
Investing Articles

2 FTSE 100 stocks I’d buy as the blue-chip index hits record highs

This Fool takes a look at a pair of quality FTSE 100 stocks that appear well-positioned for future gains, despite…

Read more »

Satellite on planet background
Small-Cap Shares

Here’s why AIM stock Filtronic is up 44% today

The share price of AIM stock Filtronic has surged on the back of some big news in relation to its…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

At a record high, there can still be bargain FTSE 100 shares to buy!

The FTSE 100 closed at a new all-time high this week. Our writer explains why there might still be bargain…

Read more »

Asian man looking concerned while studying paperwork at his desk in an office
Investing Articles

After profits plunge 28%, should investors consider buying Lloyds shares?

Lloyds has seen its shares wobble following the release of its latest results. But is this a chance for investors…

Read more »

Abstract bull climbing indicators on stock chart
Investing Articles

Something’s changed in a good way for Reckitt in Q1, and the share price may be about to take off

With the Reckitt share price near 4,475p, is this a no-brainer stock? This long-time Fool takes a closer look at…

Read more »

Investor looking at stock graph on a tablet with their finger hovering over the Buy button
Investing Articles

This new boost in assets might just get the abrdn share price moving again

The abrdn share price has lost half its value in the past five years. But with investor confidence returning, are…

Read more »

Young Black man sat in front of laptop while wearing headphones
Investing Articles

As revenues rise 8%, is the Croda International share price set to bounce back?

The latest update from Croda International indicates that sales are starting to recover from the end of 2023, so is…

Read more »