Is the Ocado share price set for a bounce-back with grocers soaring?

Does the recent grocer boom mean a reversal in the Ocado share price slump? Suraj Radhakrishnan analyses the long-term potential of the stock.

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The Ocado (LSE: OCDO) share price saw a dramatic slump in mid-February after a great end to 2020. Ocado shares outperformed the FTSE 100 last year, showing an 80% increase in share price. The online grocer started 2021 strong, with the share price growing 26% from 2,287p at the end of 2020 to 2,883p by the end of January 2021. But since then, the share price fell consistently, reading 1,828.5p on 3rd June. This 36.5% decrease brought the share price to a 52-week low, with its market value falling from over £22.3bn to £14.7bn. 

If you consider mid-term returns, Ocado shares have given shareholders a whopping 720% return in the five-year period between June 2016 to the present day, making it the #1 performing FTSE stock during this period. In the past year, however, the figure shows a measly +0.08% return. What caused this significant slide, and do I think Ocado stock can recover?

Ocado’s focus on robotic warehouses came to fruition during the pandemic, which caused a massive uptick in the share price. The focus on technology-driven retail enabled the company to outperform rivals who struggled to keep up with the growing demands of fast-moving consumer goods (FMCG) and ecommerce sales during the Covid-19 lockdown period. This saw the market share of the company grow by 2%. 

Ocado CEO Tim Steiner seems to think that the market explosion in H2 of 2020 is not a one-off event triggered by the increase in demand. The company has been poised to take a larger share in the grocery market, with him supporting claims stating that returning users who placed three to five orders on the platform stayed loyal to the brand.

The grocer boom

This week, a potential buyout deal for  Morrisons caused its share price to explode, increasing by 35%, going from from 178p to 240p. The now rejected £5.5 billion bid from US-based Clayton, Dubilier & Rice for Morrisons boosted the price of other major UK grocers too. Tesco and Sainsbury stock rose 1.7% and 3.8% respectively. 

Ocado, which is partnered with Morrisons, also saw a 4.82% uptick in share price in the last five days. I think this increase can be directly attributed to the furore surrounding the takeover news. 

Ocado share price risks

Despite this short-term boost in the share price and the long-term potential I see in the tech-driven Ocado Smart Platform that facilitates “front-end interface for ordering; automated fulfilment through our CFCs and last-mile operations for delivery” to large grocery retailers across the world, the financials and lawsuits still concern me.

The ongoing patent infringement lawsuit by AutoStore Technology against Ocado is worrying, as an unfavourable judgement could halt Ocado’s expansion plans in the UK and US and threaten the validity of the smart platform that the company is built upon.

Also, the negative price-to-earnings ratio displayed in the company’s financials and the lack of dividend yield makes me wary of the long-term potential of Ocado shares. Though there is immense potential in its technology, there are too many risks for me to consider Ocado for my portfolio in 2021. 

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.

Suraj Radhakrishnan has no position in any of the shares mentioned. The Motley Fool UK has recommended Morrisons, Ocado Group, and Tesco. 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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