The Motley Fool

Can the Ocado share price start rising again?

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Stack of British pound coins falling on list of share prices
Image source: Getty Images

It is a disappointing day for investors in Ocado (LSE: OCDO). The FTSE 100 e-grocer’s share price has dropped from yesterday on a weak update it posted earlier today. 

Trading update

A fire at its Erith customer fulfilment centre in July meant that it had to cancel orders and had less capacity to offer slots to new customers. This showed up in a 10.6% revenue decline for its June-August quarter compared to last year. 

5 Stocks For Trying To Build Wealth After 50

Markets around the world are reeling from the coronavirus pandemic… and with so many great companies trading at what look to be ‘discount-bin’ prices, now could be the time for savvy investors to snap up some potential bargains.

But whether you’re a newbie investor or a seasoned pro, deciding which stocks to add to your shopping list can be a daunting prospect during such unprecedented times.

Fortunately, The Motley Fool UK analyst team have short-listed five companies that they believe STILL boast significant long-term growth prospects despite the global upheaval…

We’re sharing the names in a special FREE investing report that you can download today. And if you’re 50 or over, we believe these stocks could be a great fit for any well-diversified portfolio.

Click here to claim your free copy now!

To understand how far the fire is responsible for this decline, it is helpful to estimate the loss because of it. Ocado has provided a number of £35m. After I add the number to the actual revenue for the quarter, it is still less than last year’s figure by 4.5%. This means, that more than half the gap in revenue can be explained by a correction after the easing of restrictions. This is further supported by the fact that even for the six weeks before the fire, Ocado’s revenues were down by 1.8% .  

Why I’m optimistic about Ocado

However, there are three aspects to the update that make me optimistic. First, some of the revenue loss can be explained by a reduction in the average size of the customer basket, which it mentioned in the update, and not the loss of actual customers. This was to be expected, since we are now spending less time indoors and are less dependent on at-home consumption.

Second, it continues to add to its customer base, indicating ongoing expansion of its services. This suggests the potential for the company to bounce back from the latest revenue setback. In fact, it expects to deliver “strong revenue growth in FY22”. 

Third, it says in its update that Marks & Spencer (M&S) products now accounts for 29% of its order basket number. I would have been on the fence about this development at any other time, considering that the retailer has been struggling for a while. Not now, however. M&S recently reported an unexpectedly big increase in revenues and even upgraded its profit guidance for the year. This bodes well for Ocado too.

My takeaway

Despite this, the company’s share price has dropped some 20% in the past year. Some softening was due, going by the scorching growth seen last year. Because Ocado was one of the few FTSE 100 gainers in the lockdown, there was great demand for its stock, driving its price to all-time-highs. But I think a pick-up in its share price is overdue now. 

I reckon that as the latest trading update is absorbed better over time, it could give a fillip to the stock. Also, the risk of another lockdown could make Ocado a good stock to buy. In any case, I think its long-term story is intact, because it caters to the growing online sales industry. Now, of all times, it is a buy for me.

One FTSE “Snowball Stock” With Runaway Revenues

Looking for new share ideas?

Grab this FREE report now.

Inside, you discover one FTSE company with a runaway snowball of profits.

From 2015-2019…

  • Revenues increased 38.6%.
  • Its net income went up 19.7 times!
  • Since 2012, revenues from regular users have almost DOUBLED

The opportunity here really is astounding.

In fact, one of its own board members recently snapped up 25,000 shares using their own money...

So why sit on the side lines a minute longer?

You could have the full details on this company right now.

Grab your free report – while it’s online.

Manika Premsingh owns shares of Ocado Group. The Motley Fool UK has recommended Ocado Group. 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.

Our 6 'Best Buys Now' Shares

Renowned stock-picker Mark Rogers and his analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.

So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply click below to discover how you can take advantage of this.