It has been a good time recently for many tech stocks in the massive US market. On this side of the pond, one company with a proprietary tech platform seeing strong performance is Ocado (LSE: OCDO). The Ocado share price has risen by a quarter in just the past 10 days.
Can this sort of performance continue – and does it make sense for me to buy Ocado shares right now?
Long-term trend
In some ways, the latest Ocado share price action can be seen as a correction.
Over a longer period, the trend remains firmly downhill, even after the recent surge. On a one-year basis, Ocado shares have lost 45% of their value. The five-year return has been -60%. Not only has the share price tumbled, the company is not currently a dividend payer and I do not expect that to change any time soon.
Still, a 25% rise in days suggests a significant change of heart by at least some investors. What’s going on?
No news
The short answer seems to be… nothing! Since the start of the month, Ocado has not released any news that would significantly affect its business prospects.
Yes, the chief executive bought shares yesterday. But only £151 worth of them, as part of a regular monthly investment plan. That is hardly the sort of insider buying that typically excites the City.
So I reckon the recent Ocado share price rise reflects a fundamental revaluation of the company, rather than a reaction to an important development.
Cash pit
Personally though, I continue to have my doubts about the cash-hungry business model at lossmaking Ocado.
Total revenues last year grew less than 1%. Revenues in the retail division actually fell. The international solutions business more than doubled revenues, but remains a fairly small part of the overall business.
The company’s pre-tax loss surged to half a billion pounds. That is around one seventh of the current market capitalisation of £3.6bn. Net debt rose to £577m, while the company generated negative cash flow even after taking into account over half a billion pounds from issuing shares.
For now, Ocado looks like a cash pit to me.
Not buying
That could change. A lot of Ocado’s heavy expenditure in recent years has been on building its distribution network and customer-specific facilities for a range of well-known clients worldwide. Those involve heavy capital expenditure upfront but, hopefully, that can enable the company to profit from long-term contracts to work with such retailers.
In principle, that could give Ocado a strong competitive moat that ultimately sees it turning large profits.
For now though, I see the business model as unproven. The more property it builds, the closer I think Ocado looks to be a property company rather than a scalable tech platform.
The business continues to spend heavily and lose money. Even at today’s Ocado share price, I do not see value for my portfolio if the business model does not ultimately prove itself.
Whether that happens remains to be seen, so I have no plans to buy.
