Ocado (LSE: OCDO) shares have come down a long way recently. This time two years ago, they were trading above 2,500p. Today however, they can be snapped up for less than 750p.
Is this a great opportunity to buy the shares for my portfolio? Or is Ocado a risky play from here? Let’s take a look.
Two businesses
Ocado has two main business segments.
The first is its home delivery division. Here, it partners with M&S to deliver groceries in the UK. Currently, it has a near 2% share of the UK grocery market.
The second is its Ocado Solutions division. This offers end-to-end technology solutions that help other supermarkets move their operations online. Supermarkets that Ocado is currently serving here include Morrisons, Groupe Casino, and Coles.
So, how are these segments performing right now?
Mixed performance
Well, after a boom during Covid-19, the retail side of the business has really slowed down recently.
For the year ended 27 November, sales were down 3.8% year on year to £2.2bn. And the company said that inflation, marketing costs, and investments to support future growth would weigh on profitability.
Looking ahead, the group said that it expects mid-single-digit revenue growth for the year ending 28 November 2023. It advised that it expects EBITDA (earnings before interest, tax, depreciation and amortisation) to be negative in the first half of the year and positive in the second half.
As for the Solutions side of the business, this seems to be gaining traction. In November, Ocado announced a new partnership with Lotte Shopping – one of the largest supermarket companies in South Korea. This will see the two companies develop a network of robotic warehouses across South Korea to expand Lotte’s online shopping business.
Lotte will pay Ocado fees upfront and during the development phase, then ongoing fees linked to both sales achieved and installed capacity. And these fees could be significant. Analysts at Numis reckon they could amount to around £100m when at full capacity.
It’s worth noting that Ocado CEO Tim Steiner is confident that there are more deals like this to come. “We are encouraged by our strong pipeline of potential new partners, all of whom recognise the opportunities of channel shift online,” he told reporters in November.
Growth potential
I have to admit, I’m quite excited about the potential of the Ocado Solutions division. Especially in today’s inflationary environment.
One thing Ocado has going for it is that its automation solutions can help supermarkets cut costs. By using automated warehouses, driverless vehicles, and industrial robots, companies can reduce staff costs significantly and beat inflation.
Having said that, this division is a big drain on profitability. For the year ended 27 November 2022, the company is expected to post a net loss of £412m. For this financial year, it’s expected to post a net loss of £369m.
These projections are a bit of a turn-off for me. In the current environment, investors don’t have much time for companies that are losing a lot of money.
My move now
Putting this all together, I’m going to leave Ocado shares on my watchlist for now.
I do think the company’s automation technology looks interesting.
However, given the projected losses, I think there are safer stocks to buy for my portfolio today.
