Ocado shares: a post-pandemic surprise?

In general, online supermarkets experienced a turbo-charged boom during lockdown, can the momentum continue with Ocado’s shares?

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What hasn’t been said about Ocado (LSE: OCDO) shares? For those lucky enough to buy the online supermarket’s shares a year ago, they would have seen an 85% rise, two years ago a 99% rise and three years ago 282% from today’s price (at the time of writing) to 2,078p.

Ocado’s trajectory shows no sign of abating, although the online supermarket’s shares experienced a slight wobble in February this year – a fall of around 25% compared to its current share price. In a recent report by retail consultancy Kantar, take-home grocery sales rose by 12.5% in the 12 weeks to 21 February.

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Fraser McKevitt, head of retail and consumer insight at Kantar, said: “The pandemic has now been making its mark on our lives and completely changing the way we shop for a full year.

“Various hospitality restrictions mean that we’ve eaten an extra 7bn meals at home since spring 2020. Office tea rounds were replaced by brews in our own kitchens, and we drank an additional 2bn cups of tea in the house this year.

“Overall, shoppers have spent £15.2bn more on groceries during the pandemic – around £4,800 per household on average, an increase of £500 compared with normal times.”

Kantar added that Ocado had seen sales growth of 35.3% in the latest 12 weeks, easing its market share up to 1.7%.

Should I buy Ocado shares?

Ocado’s shares could be viewed as pricey, nearing the 2,100p mark, but the online grocery still looks attractive – 50% of its retail business is now owned by M&S. Sales are booming thanks to lockdown (if there are any silver linings?) and Kantar predicts that a proportion of first-time online delivery shoppers are likely to stick with this for the long term.

Let’s look at Ocado’s recent full-year results from February. Revenue of £2.2bn was just over 35% higher than last year, despite higher costs including pandemic-related expenses. Cash profits more than doubled to £148.5m.

For 2021, Ocado expects double digit percentage revenue growth in UK Solutions & Logistics, and invoiced fees for International Solutions fees to rise 30%.

All very positive.

On the one hand, some analysts believe Ocado’s shares will rise. Berenberg has reiterated its “buy” stance with a target price of 2,925p. However, Barclays has recently reiterated its “underweight” stance as it said it was disappointed and surprised that “2020 did not see any new deals inked”.

The bank noted that Ocado’s £20bn valuation depends on it building a steadily bigger pipeline of Customer Fulfilment Centre orders. Although the early evidence is that its first international facilities are working well and will generate follow-on orders, Ocado will likely need to attract new grocery customers to justify the valuation, it said. The bank has a 1,600p price target for Ocado’s shares.

The jury is out.

However, with the pandemic boosting the online grocery market, not temporarily, and the might of M&S behind Ocado, I’m a happy holder of the shares in my SIPP. What’s more, the online supermarket has even reassured investors about its post-Brexit supply chain, which is music to my ears!

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Sabuhi Gard owns shares in Ocado. 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.

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 considered, so you should consider taking independent financial advice.

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