Ocado (LSE: OCDO) is a rare FTSE 100 stock indeed. It is a thoroughbred tech company in an index full of mature banks, insurance groups, and giant miners.
However, unlike many of these well-established blue chips, Ocado still isn’t profitable. And the share price has crashed 58% in a year, as many investors seem to have lost patience with the red ink it keeps delivering.
This means the shares are now trading for less than they were in the autumn of 2013, which suggests that the stock may be oversold. After all, this is a much larger business than it was back then.
So, I’ve been revisiting the investment case to assess whether this could be a good time to buy Ocado shares.
What problem is Ocado trying to solve?
Going to the supermarket has often been voted people’s second-least favourite chore (after ironing). Ocado’s online grocery business was founded with this fact in mind.
Today, it operates two segments. One side builds robotic warehouses across the world in partnership with leading global grocers. These include the likes of Kroger in the US and Lotte Shopping in South Korea. In FY2022, revenue for this business line more than doubled over the previous year.
Then there’s Ocado Retail, which is its UK joint venture with Marks and Spencer Group. This division makes up the bulk of the group’s overall revenue, but is growing at a snail’s pace.
Ultimately, the aim of Ocado is to reduce the cost of groceries for consumers and help its partners take market share.
In theory, that should work. Its swarming armies of robots can assemble a 50-item order in as little as five minutes compared to an hour in a physical store. The labour cost savings should be enormous.
However, the company seems a long way from making this work profitably. Despite a capital expenditure in the billions over 23 years, the group still registered a pre-tax loss of £501m last year.
A big sticking point
Data from consultancy firm Kantar shows that 11.7% of UK grocery spending is done online today, up from 8% pre-Covid. But that’s down from a peak of 15.4% in February 2021 at the height of the pandemic.
Clearly, many older shoppers have returned to the familiarity of supermarkets since the end of the public health emergency. Yet younger people still tend to use online shopping almost by default.
So Ocado sees no reason in theory why that 11.7% figure can’t become 50% over time, assuming the service and value proposition keeps improving.
However, in a 2022 study cited by Statista, most UK consumers saw no difference in value between online and in-store groceries.
So it seems price remains a big sticking point preventing the mass adoption of online grocery shopping.
Will I buy the shares?
If inflation starts to come down in the months ahead, then perhaps shoppers will loosen the purse strings. That might translate into larger basket sizes for Ocado Retail. This could help the share price recover somewhat.
Longer term, I’m excited about the company’s automated warehouse division as it continues to expand worldwide. But I’m less enthusiastic about the larger, slower-growing UK retail operation.
So, I think I’m going to keep these falling shares on my watchlist for now.
