Earnings: why Ocado shares are nosediving today

Ocado shares are plunging today after the online grocer released its latest earnings report. Should this writer now buy the stock?

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Ocado (LSE: OCDO) shares plummeted 7.6% today after the online grocery firm announced its full-year results. This now means the stock is 58% lower than it was 12 months ago. Indeed, since peaking at over £28 per share just two years ago, the stock has lost 79% of its market value!

The pandemic — when home deliveries surged alongside Ocado’s share price — now seem like a distant memory. But should I buy the stock at 577p for its longer-term potential?

Further losses

In the year to 27 November 2022, the company reported group revenue of £2.5bn, which was broadly flat compared to the previous year. Its pre-tax loss rose to £501m, up from £177m a year before. Analysts had forecast an annual loss of ‘only’ £399m.

The company has two sides to its business. Ocado Retail is its grocery delivery joint venture with Marks & Spencer. Ocado Solutions builds robots and software for other online retailers around the world.

The company said it had been a “challenging year” for Ocado Retail, as sales fell by 3.8%. However, this was offset by continued growth at the Solutions side of the business, where international revenue more than doubled to £148m from £67m in FY21.

Bright spots

The active customer base at Ocado Retail did grow 13% year on year to 940,000. The problem is customers are putting fewer things in their online baskets due to higher food prices. The average basket size fell to 46 items last year from 52 in the previous year, reducing the average value to £118 from £129.

Looking ahead, however, there should be continued revenue growth in the Solutions segment as more Customer Fulfilment Centres (CFCs) go into operation. These are the state-of-the-art automated warehouses Ocado builds and operates for its partners, where fleets of robots zip about fulfilling grocery orders.

The company will earn revenue from each new CFC and has the ability to add new modules to existing centres if need be. Over time, these centres should help its clients cut costs, as automated selection by industrial robots can significantly reduce staffing costs and improve efficiency.

For 2023, Ocado is guiding for mid-single-digit growth at Ocado Retail and 40% growth in its Solutions division.

Will I buy the stock?

The company has over £1bn in cash on the balance sheet. Management expects this to be enough to finance around four to six years of further investments, by which time the group expects to be cash flow positive. Then it expects the cash flows from its existing CFCs to be sufficient to finance future investments.

If that occurs, then investing today could prove to be a lucrative move on my part. After all, Amazon was loss-making for many years before eventually churning out mountains of free cash and making shareholders a lot richer.

However, I don’t think we’re looking at an Amazon-type situation here. I feel Ocado’s eventual profits are likely to be incremental rather than explosive. And of course, there’s a risk they never materialise at all.

All things considered, there’s enough here with the technology side of the business to keep me interested. I may become a shareholder one day, but for now I’m keeping the stock on my watchlist.

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. Ben McPoland has no position in any of the shares mentioned. The Motley Fool UK has recommended Amazon.com and Ocado Group 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.

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