Ocado (LSE: OCDO) shares are down 30% from their recent highs in January. Last Tuesday, Ocado released its interim results for the first half of 2021. Since then, the Ocado share price has fallen a further 8%. What caused this decline and will I be adding Ocado shares to my portfolio?
How did the company fare over the last six months?
Ocado revealed that it grew in the first half of the year. Revenues grew 21% year on year to £1.3bn. This growth came as the pandemic caused customers to eat out less and turn to online grocery retailers as an alternative to shopping in person. During the period, earnings before interest, taxation, depreciation, and amortisation (EBITDA) also grew by 58% to £61m.
Ocado registered a loss of £20.6m for the period. This is largely thanks to the massive investments the company is currently making to expand its portfolio of state-of-the-art automated customer fulfilment centres. As these investments should lead to future growth, the firm’s losses do not worry me too much at this stage.
Ocado’s strong balance sheet also helps the situation. Currently, the company has a net cash position of £189m. As such, it should be able to withstand future losses and avoid financial distress.
Why has the Ocado share price fallen?
In my opinion, one of the main reasons for the recent decline in the share price is that investors are worried that Ocado cannot maintain its current rate of growth. As the economy starts to recover from the pandemic and lockdown measures are eased, more people have returned to restaurants and physical supermarket shops. As such, the demand for Ocado’s products is beginning to normalise. This was confirmed on Tuesday when the company reported that customer basket sizes are moving back towards pre-pandemic levels.
This concern is reflected in analysts’ forecasts. The median estimate among analysts is for revenues to grow by 16% in 2021. Although this is still strong growth, it is a sharp decline from the 33% growth the company achieved in 2020. I think this predicted decline in the growth rate, coupled with the fact that the Ocado share price had already increased by over 167% since the start of the pandemic, caused many investors to sell their shares in the company.
What’s in store for Ocado?
Despite the challenges the company faces with the reopening of the economy, I am optimistic about the future of Ocado. When the pandemic is over, the company is still likely to benefit from the general trend towards automation, digitisation, and e-commerce. This trend accelerated during the pandemic and I am confident it will continue after the pandemic has ended. Such a trend should give Ocado the opportunity to generate long-term sustainable growth.
Will I be buying Ocado shares?
As a general rule, I do not invest in unprofitable companies. This is because they are usually very difficult to value.
However, as I am positive regarding the future of this company, I will certainly be keeping my eye on the Ocado share price with a view to adding it to my portfolio.
