Down 50%: is it time to buy Ocado shares?

The Ocado share price has collapsed over the last year. Roland Head asks if it’s time to take a fresh look at this technology and retail group.

| More on:

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.

Middle-aged white man wearing glasses, staring into space over the top of his laptop in a coffee shop

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Ocado (LSE: OCDO) shares fell on Tuesday, after the company reported disappointing Christmas sales results, and said that its grocery retail business would deliver a result “close to break-even” in 2023.

Although Ocado shares have bounced back from the lows seen in October, the stock has still fallen by 50% over the last year.

After such a sharp decline, Ocado stock is trading at levels previously seen in 2018. However, the business has made considerable progress since then, selling its automated warehouse technology to a number of big retailers.

Is this FTSE 100 share now starting to look like a contrarian buying opportunity? I’ve been taking a look.

What’s gone wrong?

Ocado’s grocery retail operation is a joint venture with Marks & Spencer. Tuesday’s numbers showed that online sales rose by just 0.3% to £549m during the final quarter of last year.

Given the impact of price rises, this means that sales volumes fell. Ocado admits that the average number of items in each order fell by 8.3% to 45, compared to the same period in 2021.

In contrast, both Tesco and Sainsbury reported sales growth of around 5% in the final part of last year.

These numbers wrap up a poor year for Ocado Retail. The company says that revenue for the whole of 2022 fell by 3.8% to £2.2bn. That’s the first fall in the company’s history.

Underlying retail profits for the year are expected to be “close to break-even”. City analysts had previously expected a figure of around £35m.

Forget retail, tech is the attraction

With grocery sales of just over £2bn, Ocado Retail is too small to challenge the big UK supermarkets. Sainsbury’s annual sales are around £30bn, for example.

The real opportunity for Ocado shareholders is the group’s technology division. This provides robotic warehouse systems for other retailers — known as the Ocado Smart Platform.

The company has signed up a number of major foreign retailers as clients over the last few years. These have included US retail giant Kroger and more recently South Korean firm Lotte Shopping.

In a presentation last November, management said that the technology business now has a “a clear path” to generating more than £1.1bn in fees each year, over the medium term. Profit margins on this income could be as much as 70%, according to the presentation.

If Ocado can deliver on this promise, then I think the shares could be cheap at current levels.

My concern is that profitability always seems to be several years in the future. In the meantime, Ocado needs to continue spending, in order to build customer warehouses and develop its own UK facilities.

Ocado shares: what I’d do

Ocado fans say that this business could be like Amazon, which lost money for 10 years before becoming profitable.

This may be true. But even if it is, investors will need to remain patient. Broker forecasts suggest the group will report a loss of around £350m in 2023, and of £245m in 2024.

Based on this outlook, Ocado’s £6.5bn valuation still looks too expensive to me. Unfortunately, I still see this as a stock to avoid.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Roland Head has no position in any of the shares mentioned. The Motley Fool UK has recommended Amazon.com, J Sainsbury Plc, Ocado Group Plc, and Tesco Plc. 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.

More on Investing Articles

Elevated view over city of London skyline
Investing Articles

I’m considering shares in this FTSE 250 investment trust while it’s trading at a discount

With this FTSE 250 investment trust trading at a discount to NAV, this Fool thinks it's a bargain. Not to…

Read more »

Investing Articles

If I’d invested £1,000 in Tesla stock a decade ago, here’s what I’d have now!

While many of us debate whether Tesla stock is worth the price today, it's undeniable that the EV share has…

Read more »

Investing Articles

Here’s what Michael Burry did as the BP share price dipped!

The BP share price has fallen from its peaks once again, and infamous investor Michael Burry may have spotted an…

Read more »

Young mixed-race woman jumping for joy in a park with confetti falling around her
Investing Articles

What on earth’s going on with the Barclays share price?

The Barclays share price has skyrocketed in recent months, becoming one of the best-performing stocks on the FTSE 100 since…

Read more »

Man writing 'now' having crossed out 'later', 'tomorrow' and 'next week'
Investing Articles

Analysts say this amazing FTSE 100 stock is a takeover target!

This FTSE 100 stock's one of the worst-performing companies on the index in 2024. So why might other companies want…

Read more »

happy senior couple using a laptop in their living room to look at their financial budgets
Investing Articles

5.4% yield! 2 UK dividend shares to consider for a £1,080 passive income

I think these UK shares could provide a large and sustainable passive income. And they could be great buys today…

Read more »

Investing Articles

Here’s how investing £250 a month could bag me over £10K in passive income annually

This Fool breaks down how she would go about building a passive income stream worth over £10,000 annually to enjoy…

Read more »

Young black colleagues high-fiving each other at work
Investing Articles

I’d snap this FTSE 250 stock up in a heartbeat for juicy returns and growth!

Sumayya Mansoor explains why this FTSE 250 property stock is firmly on her radar as she looks to buy stocks…

Read more »