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3 reasons why I think the Ocado share price could fall next year

A mother and daughter collecting their home grocery delivery.
Image source: Getty Images

The Ocado (LSE:OCDO) share price is down 28% over the past year and experienced a tough time after an initial surge following the start of the pandemic last year. Long-term holders will still have exceptional gains as the share price is up almost 600% over five years. But I personally think the bull run is over, with several reasons making me stop to think.

Pandemic pressures easing

One of the main reasons why the Ocado share price performed so well at the start of the pandemic was due to the online grocery boom. Lockdowns meant customers either couldn’t go to supermarkets or didn’t feel comfortable doing so. The fact that Ocado already had the established logistics network and website to support online delivery put it in a good place to serve those customers.

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As a result, the shares rocketed from around 1,000p at the beginning of March last year to above 2,000p in early June. It was one of the few stocks that actually gained during this period, with most others losing out due to negative Covid-19 developments.

Unfortunately, I think over the next year the situation will reverse. I think high vaccination rates in the UK and globally will help to ease negative pressure on traditional supermarkets with physical locations. Customers should feel more comfortable in getting back to a normal routine. This likely involves visiting stores in person for grocery shopping. As a result, I feel Ocado can still retain business, but may struggle make big gains.

Higher competition puts pressure on the share price

Another reason I’m cautious in Ocado shares is increased competition. For example, Deliveroo has recently launched a new service that allows delivery of groceries in as little as 10 minutes. This service, known as Deliveroo Hop, provides the ease of services like Ocado but in a much quicker timeframe. Deliveroo has launched this to keep up with other competitors that have entered the space.

Therefore, I think the market share of Ocado in this area could come under pressure in the next year. It does have a good presence, but I doubt customer loyalty in this area is particularly high.

Not just a grocer

A final reason for concern about the Ocado share price is the valuation. Even though it trades 28% lower than this time last year, that valuation is still elevated. At 1,750p, the market capitalisation is just over £13bn. By comparison, Tesco has a market capitalisation of £20bn. Yet Tesco has a market share of 27%, in contrast to 1.8% of Ocado.

The main argument against my view is that Ocado is much more than just a grocer. It has a large technology and logistics arm. In fact, other major supermarkets use the warehousing and fulfilment services offered by Ocado. So the company does have a diversified business model. Even if grocery sales aren’t strong, other areas of the business could offset this.

Yet on balance, even though Ocado is a well-diversified business, I think that investors might be sceptical about the current share price. I think I can find much more appealing investments for my portfolio in the FTSE 100 right now, so I won’t be investing.

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jonathansmith1 owns shares in Deliveroo Holdings Plc. The Motley Fool UK has recommended Deliveroo Holdings Plc, 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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