Last week, the Ocado (LSE:OCDO) share price was the worst performer within the FTSE 100. As of early Friday afternoon it was down 9.13% before a late rally saw it finish the week down 7.13%. The stock enjoyed a stellar 2020, with the pandemic meaning that an online-supermarket with home delivery was top of many people’s priority lists. Full-year results released last week highlighted this, yet the share price still manage to finish the week heavily down. What happened here?
Results and potential taxes
Last Tuesday, the full-year 2020 results were released. The Ocado share price dropped first thing on Tuesday morning. It couldn’t make it back to the levels seen on Monday throughout the rest of the trading day. But the results had shown that retail revenue growth for the year was 35%, with the solutions and logistics arm growing by 13.6%. The report flagged large scale opportunities for further growth in the online grocery space, with a target market globally valued at £2.8trn.
Ultimately, Ocado still was loss-making in 2020. It lost £44.1m before tax. This is an improvement on the 2019 loss of £214.5m, but is still a loss. Hence, the Ocado share price dropped. But Ocado should become profitable over the next one or two years if the current trajectory continues. Sometimes the market can be short term in its viewpoint, especially when results are first released.
A second reason the Ocado share price fell last week was because of concerns around a possible new digital sales tax. This is something that’s currently being discussed by the Government, and could negatively impact Ocado. Tesco and 17 other retailers (with a physical presence) had sent a letter to the Government asking for a fairer trading environment. This called for a sales tax on online retailers.
If a tax was brought in, then naturally this would reduce profitability for Ocado by the amount of the tax. If it’s a small percentage then it won’t be a big issue, but if it’s a tax the size of VAT or something similar, this could be a big problem.
Concern for Ocado shares for 2021?
The final reason that Ocado shares are struggling to hold ground is due to improved sentiment regarding getting life back to normal. News last week was positive. The virus R number in the UK dropped below 1 for the first time since July so infections are clearly in decline. It was also reported during the week that the NHS is on track to meet Government vaccination targets.
Ocado has a diversified business model involving technology solutions, logistics and international exposure. However, if the UK came out of lockdown and into some degree normality, the online grocery arm could see a revenue fall. People would feel more comfortable going back into physical stores, so Ocado as a ‘stay-at-home’ stock could struggle and continue to fall.
It might not, of course, with many consumers having now developed a taste for online grocery shopping. And if the firm can focus on growing other business arms, then I don’t see this being a huge risk in the long term for the Ocado share price. Further, even though the full-year results showed a loss, I think the business could move to profitability in the mid-term. As such, I’d look to use this dip as an opportunity to buy the stock.
