Ocado shares (LSE: OCDO) looked all played out just a few weeks ago. The FTSE 100‘s brightest tech hope had posted a string of losses as it battled to turn itself into a cutting-edge global grocery business.
On 6 June, I looked at the stock and concluded: “At some point Ocado shares may fly and make some lucky investors rich. They’d have to be brave to buy them today, though.” That sound we can hear is me wailing and spitting, because I wasn’t brave and didn’t buy them. Instead, other lucky investors got rich.
I do hate missing out
When I wrote my piece, Ocado shares traded at 358p. Friday’s price? A cool 978p, up an incredible 174%.
Much of that increase came last week, when the share price jumped 43%. Yet those lucky investors deserve their quick profits, especially as many longer-term investors will be nursing outsizes losses.
If I’d invested £5,000 in Ocado three years ago, I’d be down 52.88%. My stake would be worth just £2,356 – and that’s after the recent recovery.
What held me back was fear that the share price would carry on falling, and I’d be wailing and spitting over an instant loss. Inflation hit tech stocks hard last year by driving up borrowing costs and discounting the value of their projected future earnings.
The cost-of-living crisis also hit online grocery spend in the UK, which was already falling after lockdown. In 2018, Ocado posted a £44.4m pre-tax loss. Last year, that widened to £500.8m. Cash flows aren’t expected to turn positive until 2027, which could force Ocado into another equity raise, diluting existing holdings. So what’s changed?
Investors perked up on rumours that Amazon was lining up a takeover at 800p a share (it would have to pay a lot more now). That remains unconfirmed but the share price has held on to its gains. It added to them last Monday after Norwegian robotics firm AutoStore was ordered to pay Ocado £200m in 24 monthly instalments.
It’s still a risky stock
Autostore had waged a three-year legal battle claiming that Ocado’s robotics technology infringed six of its patents, and lost. That £200m will come in handy. It also removes the danger that Ocado would have to pay Autostore a similar sum.
While Ocado’s partnership with Marks & Spencer continues to disappoint, it may pick up when the cost-of-living crisis eases. But it’s the group’s robotics-focused Solutions division that gets investor juices flowing. It now runs 23 automated customer fulfilment centres with leading grocers such as Kroger in the US, Casino in France and Aeon in Japan. Plenty more are lined up. The potential market is vast.
Ocado’s cash flows are likely to remain negative for several more years before it finally turns a profit on all this investment. We’ve seen a sea change in sentiment, but this is still a risky stock. Worse, it’s 174% more expensive than last time I looked.
Then, I felt it was too soon to buy Ocado. Now I feel it’s too late. In future I’ll stick to my comfort zone, which is buying cheap dividend income stocks, and leave volatile growth stocks like this one to braver and luckier souls than me.
