Ocado shares (LSE: OCDO) are the FTSE 100‘s ultimate falling knife. Every time some brave – or foolhardy – bargain-seeker makes a snatch at them, they fall even further. The stock has plunged 83.92% over five years.
Yet I’m sorely tempted to buy it. I’m looking to fill up my new self-invested personal pension (SIPP) with top UK shares and it appears to offer attractive long-term growth prospects for an investor who picks the right time to buy it. Should I chance my arm today or stand well clear?
It just keeps falling
I briefly considered buying Ocado shares a year ago, but I’m glad I didn’t as they’ve fallen 62.21% since then. The idea of buying them popped into my head a month ago, and I’m glad it popped out again because they’re since down another 28.78%.
There seems to be no end to it. If I’d invested £5,000 in Ocado shares just one week ago, the subsequent 15.63% drop would have shrunk my holding to £4,218, and I would be sitting on a quickfire paper loss of £782. The UK tech hopeful’s market cap has withered to just £2.84bn and its FTSE 100 status is dangling by a thread. Who’d buy a stock like this?
Everybody loves a good story, and that’s what keeps luring investors in. Ocado has huge global growth prospects as it evolves from a pure online grocery player into a provider of cutting-edge technology for supermarkets worldwide. Its automated customer fulfilment centres (CFCs), powered by the Ocado Smart Platform, are a thing of wonder.
It has struck a string of logistics agreements with major global retailers including US grocery giant Kroger, Groupe Casino in France, Sobeys in Canada, ICA Group in Sweden and Australian retail group Coles. It added two more warehouse deals last year, Lotte Shopping in South Korea and Auchan Polska in Poland.
It has now partnered with 10 international grocers and has 45 CFCs in the pipeline, but all this takes heaps of capital expenditure, and the group has regularly posted losses over the last two decades, including a bumper £500m in 2022. Its much-heralded UK joint venture with Marks & Spencer is losing money, too.
There may be further trouble ahead
It’s the same story across the tech industry, of course. Inflation has eroded the value of tomorrow’s earnings while driving up their borrowing costs today. Yet while US tech has rebounded so far in 2023, Ocado is the worst performer on the FTSE 100.
The cost-of-living crisis hasn’t helped, with Ocado building capacity to process 700,000 orders a week in the UK but delivering fewer than 400,000. The great shift to online grocery shopping isn’t happening as fast as CEO Tim Steiner expected during the pandemic.
Like everybody else, IT has also struggled with rising food and fuel prices. April’s disturbingly high inflation figure helped trigger the latest stock drop.
Cash flows aren’t expected to turn positive until 2027, which could potentially force Ocado into another equity raising, diluting existing holdings.
At some point, IT should reach its long-awaited inflection point, and the shares could then soar. Yet for now the knife keeps falling and I’m not quite brave enough to buy them today. I’m fully aware that one day I might regret that. I’ll keep watching, and waiting for my moment.
