Last week was another tough one for Ocado (LSE:OCDO). The share price fell by 19%, to close the week at 733p. Over the past year, Ocado shares are down 65%, compounded by poor results from H1 2022. When I last wrote about the stock in July, I said I was steering clear of it. But after another slump, is now the right time for me to buy?
Inflation woes mounting
Over the past few weeks, nothing material has changed at Ocado. Rather, the main driver for the push lower is what’s going on in the broader economy.
UK inflation hit 10.1% in July, with the figure coming out after the H1 results. Within the results, I noted the concern that the business had around cost inflation. If that was a worry it had back when the report was being written, it’s only going to be worse now. Not only that, but expectations for inflation are now even higher for the next six months.
So I think investors are clearly worried about how future inflation is going to mean Ocado making a smaller profit margin from the retail division. Or if it puts up the price of groceries, it could lose out on customer business.
Even for the logistics arm, inflation is a headwind. It mostly services other companies in the same sector, all of which will be feeling the pinch from higher prices too. This could mean a reduction in the usage of the service going forward.
Heavily reliant on retail
While Ocado is making good progress with the UK and international solutions and logistics arm, the retail side of the business dwarfs it. For example, in H1 the former generated around £453m in revenue, the latter £1.12bn.
For all the good work being done, I feel Ocado is very exposed to a fall in consumer demand from the retail division. Customers are really starting to feel the pinch with the cost-of-living crisis. Switching grocery shopping to a cheaper brand is something that I think many will do.
Given that Ocado can’t offset this potential dive with other areas of the group, I don’t think the outlook is great. The fall in the share price last week makes me think I’m not alone in this thinking.
Value in Ocado shares
Some could argue that now is a good time to buy, citing that the business is undervalued. The fact that the firm is losing money means I can’t use a conventional price-to-earnings ratio to compute this. But any stock that has lost 65% in a year could be a smart long-term play.
Further, if inflation does peak this winter and then normalises early next year, Ocado could ride out the storm. It’s only a medium-term issue and isn’t something that fundamentally invalidates the business model.
Yet ultimately, I still can’t get excited about the prospects for the business, so won’t be investing.
