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Is there still more upside potential for Ocado shares?

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Ocado (LSE: OCDO) shares are doing well. As I write this, they stand about 60% higher than where they started 2020. While Covid-19 and lockdown have been hurting many businesses, online grocery shopping has been the great beneficiary. In this sector, Ocado seems to be the reigning king.

Fundamental shift?

The key question we need to ask about the upside potential for Ocado shares, is how long will this last? Lockdown obviously brought many more shoppers online, but Ocado needs them to stay. Otherwise, the boost to its numbers will be short lived.

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Personally I find it hard to imagine that many customers who have started using Ocado will not continue to do so. The move towards online shopping is a trend we have been seeing for years. As Ocado CEO Tim Steiner puts it, “As a result of Covid‐19 we have seen years of growth in the online grocery market condensed into a matter of months and we won’t be going back”.

I am not so sure it is quite this clear cut, but I think there is a lot of potential for this to be true. Interestingly Ocado also looks set to benefit from the broader move to online shopping in other supermarkets.

According to Steiner, Ocado has always found it easier to poach online customers from other supermarkets. This means there is potential for Ocado to benefit from a migration of sorts. New online shoppers at Tesco and Sainsbury’s may just move to Ocado.

Ocado also has another massive advantage of these high street supermarkets. Though it had some capacity teething trouble when lockdown first began, Ocado has automated, cost-efficient processes in place for picking and delivery. Its supermarket rivals meanwhile, were forced to higher people to actually go around their stores picking up grocery orders. This massively reduces the profit margins.

Are Ocado shares too high?

Despite these positives, however, I still worry that the Ocado share price is too high. At the very least, it is not offering much capacity for upside. While its latest numbers certainly show improvement (its pre-tax loss dropped to just £40.6m), it is still not making a profit.

In large part this is due to investing in its automated customer fulfilment centres as a product in their own right. There is a lot of potential in this area for Ocado going forward, so this investment may be a good move.

But if Ocado can see all these benefits from lockdown and still not break even, it raises questions for investors. Ocado shares are certainly going to be ones I keep an eye on. I suspect, however, there will be better opportunities in the future. Perhaps when the share prices losses some of its gilded edge.

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Karl 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.

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