The Ocado (LSE:OCDO) share price has surged in recent days amid signs the outlook for the company could be improving. However, the stock still has a long way to go. It’s fallen 85% from its pandemic peak and the business only narrowly avoided relegation from the FTSE 100 index in the latest reshuffle.
So, is the share price recovery sustainable? Or will the company’s difficulties continue to weigh on its stock market performance?
Here’s my take.
Disruptive innovation
Ocado’s strategy centres on a belief that grocery retail will increasingly move to the online world, rather than remain in the traditional bricks-and-mortar arena. A pandemic boom in online shopping lifted the share price over £28, but investors’ optimism has since faded in light of consistently poor financial results.
The company has three core elements. First, there’s international solutions and logistics. This unit licenses its end-to-end e-commerce and fulfilment offering, the Ocado Smart Platform, to a variety of supermarkets around the world.
Second, the firm also partners with Morrisons in UK solutions and logistics. Ocado’s robotic warehouses that support these operations make it a fully-fledged tech company, rather than just a traditional retailer.
But poor sales from the company’s third division — Ocado Retail, a joint venture with Marks and Spencer — had until recently spooked the markets. Nonetheless, it appears to have been given a new lease of life from increases in annual revenue and profits at M&S.
Although the division’s still struggling, the FTSE 250 supermarket’s continued support for the project has calmed investors’ nerves for now, saving Ocado’s place in the FTSE 100.
Keeping up with competitors
One positive sign is Ocado’s increasingly competitive pricing amid inflationary pressures and squeezed household budgets. This could help to alter the company’s image of being expensive compared to its peers.
According to a survey of 26,000 products conducted by Which?, Ocado’s prices showed the smallest annual increase of major supermarkets in the year to May,
| Supermarket | Annual inflation rate |
|---|---|
| Lidl | 24.9% |
| Aldi | 22.9% |
| Morrisons | 18.4% |
| Asda | 17.5% |
| Sainsbury’s | 14.7% |
| Tesco | 14.5% |
| Waitrose | 13.1% |
| Ocado | 11.0% |
Weak financials
There’s no escaping the fact that the investment outlook for the shares is clouded by poor results. The group posted an eye-watering £500.8m loss for FY22, considerably down on the £176.9m loss in FY21.
Ocado Retail is expected to deliver “marginally positive” results this year. However, I’m taking this guidance with a pinch of salt considering the company has a history of downgrading its own forecasts.
What’s more, the debt position continues to head in the wrong direction. At the end of FY22, there was £577.1m in net debt on the balance sheet, compared to £359.8m in the prior year.
A growth stock to buy?
If investors are considering buying Ocado shares, they can take comfort in the company’s ambitious vision for the future. Provided online shopping takes off in the way the firm expects, the stock might prove to be a good long-term investment at today’s beaten-down price.
However, I won’t be adding the company to my own portfolio. Overall, the group’s lack of profitability and a litany of past disappointments are enough to dissuade me from investing. I’ll be looking for other FTSE 100 stocks to buy instead.
