Ocado Group (LSE: OCDO) is a FTSE 100 supermarket stock that is up by 620% since its IPO in 2010. This translates to an annualised return of 38% over the past five years, even after a drop of more than 55% since its peak in February 2021. It makes me wonder whether Ocado is a bargain or a value trap.
Ocado holds over 15% of the UK online grocery market share. The company uses its own software called Ocado Smart Platform (OSP), launched in January 2022, which means a bigger addressable market, the opportunity to win new partners more quickly, and fresh opportunities for growth.
Online trends
Due to the pandemic, millions of consumers have switched to online shopping and e-commerce, changing their way of shopping in just a few weeks. It helped the disruption that digital technologies are bringing to online grocery shopping.
However, as normality returns, consumers are returning to previous habits. Impressively, Ocado’s revenue grew 7.14% over the previous year.
Results
Ocado’s revenue has grown year over year (YOY), reaching £2.5bn in 2021. Looking closer, its international revenue increased from £17m to £67m in 2021, up 300% YOY. The orders per week indicator was up 11.9%, however, the average basket value was £129, down 5.8%. One potential reason to see this indicator falling is due to consumers spending less, as they have less buying power nowadays.
Overall, it was a strong financial year and, as the icing on the cake, Ocado reported 832,000 active customers, up 22% YOY. In addition, Ocado has more cash than debt, a very important metric to which I pay special attention.
However, what worries me most, and the reason why its shares are potentially risky, is the bottom line. Ocado has never turned a profit, and the group recorded a £186m loss for the period.
My take
I believe that Ocado has a network effect, which means that the more business partners join Ocado, the more consumers will be attracted and vice-versa. The group is also aware of it and is improving the partner’s experience. Ocado announced partners can use their own webshop and app solutions while taking advantage of the data-collecting and analytics of OSP. This is a benefit that will surely entice more partners to sell through Ocado in my opinion.
Ocado is a speculative stock and, as consumers revert to their pre-pandemic in-store shopping habits, the share price may struggle in the short term. However, I invest by thinking long term and I see a competitive advantage over other competitors. Online grocery shopping will be the future in my opinion and Ocado Group is well positioned in this market. Therefore, I will be adding the stock to my portfolio with a view to holding it for at least the next five years.
