Is it time to buy Ocado shares ?

Ocado shares have fallen over 70% from their highs. As the company rapidly expands its technology solutions, should I take a second look at Ocado?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

A mother and daughter collecting their home grocery delivery.

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Ocado (LSE: OCDO) was the pandemic darling of the UK: now trading at around 740p, the shares once peaked at a high of 2,800p.

At first, the return of in-store shopping and rising inflation significantly hurt the stock. But then, as a tech company with negative cash flows, rapidly rising interest rates pushed investors towards safer assets and made the stock less attractive.

A unique player

Ocado is a unique company in the grocery business. It uses automation to beat traditional stores in online groceries, saving five times the labour that traditional grocery stores need to fulfil online orders.

Moreover, with experience running its own online grocery stores, it’s able to offer end-to-end solutions for automating online groceries for stores around the world.

Technology solutions can carry this stock

One of the most optimistic parts of its business is its technology solutions segment, which sells software and hardware (known as CFCs, customer fulfilment centres) to grocery stores around the world to improve their online grocery efficiency. As consumers’ pockets tighten, grocery stores have an even bigger incentive to streamline their operations, which led technology solutions to grow at an astounding 59% year on year (YoY).

Its offerings are also effective. Retailers like Kroger saw a 25% increase in units picked per labour hours, explaining why Kroger continues to implement Ocado’s products in more of its stores.

Finally, its customers are very sticky, as recurring fees increased by 61% YoY. This makes sense because not only does Ocado save companies money, it’s also hard to switch away once stores build out Ocado’s hardware.

While this segment only comprises 11% of total revenue, with a lot more CFCs to come and management forecasting 40% growth in revenue, it’s no surprise that investors are so optimistic.

Worrying financials

Ocado’s major weakness is its financials. Net losses have continued to widen year over year due to inflation. Its grocery business has been hit the hardest, as EBITDA declined from £31.3m in 1H 2022 to a £2.5m loss in 1H 2023. On the positive side, Ocado has been able to marginally improve its market share and management is expecting slightly positive EBITDA in retail next year.

In addition, its capital expenditures continue to be high because of investments in its technology solutions segment, increasing 18.9%. As interest rates continue to rise and macro conditions remain uncertain, the lack of profitability not only worsens investor sentiment but makes the stock highly volatile.


Looking at its price-to-sales (P/S) ratio, it’s trading at a mere 2.74x – just slightly higher than its five-year low of 1.01x. Though it seems like it’s trading at a steep discount, the company is also transitioning from a phase of rapid growth to pivot to technology solutions as the macro conditions sour for its online grocery business. As a result, the stock seems cheap because investors are uncertain about its future.

Should I buy it?

Ocado is at a critical point in its business where a successful expansion in technology solutions could significantly grow revenue and earnings for years to come. At the same time, the macroeconomic environment — especially the projected 2024 UK recession — is hurting Ocado at its core of online groceries. Taking everything into account, I’m not going to be taking a gamble on Ocado until we have a more accurate picture of the economy or if the stock becomes oversold.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Michael Que has no position in any of the shares mentioned. The Motley Fool UK has recommended Ocado Group Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Middle-aged black male working at home desk
Investing Articles

Are these top-traded FTSE 100 shares the best to buy for 2024?

The market has disagreed with me pretty much all year on the best buys among FTSE 100 shares. But, are…

Read more »

Young black colleagues high-fiving each other at work
Investing Articles

My five favourite forms of passive income

I've been looking for ways to pump up my passive income, so I can retire richer. But which of these…

Read more »

Silhouette of a bull standing on top of a landscape with the sun setting behind it
Investing Articles

What’s the FTSE 100’s best 10% dividend yield?

Depressed prices have thrown up some golden opportunities on the FTSE 100. Which of these 10%-yielding Footsie stocks should I…

Read more »

Two white male workmen working on site at an oil rig
Investing Articles

BP shares look dirt cheap

Are BP shares a brilliant bargain? The financials look excellent and it’s hard not to call them anything other than…

Read more »

Mindful young woman breathing out with closed eyes, calming down in stressful situation, working on computer in modern kitchen.
Investing Articles

My 12 fears for the stock market in 2024

After a terrific year for global stock markets in 2023, what can I look forward to in 2024? As a…

Read more »

Young woman working at modern office. Technical price graph and indicator, red and green candlestick chart and stock trading computer screen background.
Investing Articles

2 income shares for bumper dividends in 2024

I own these two income shares for their outstanding ability to deliver billions of pounds of cash dividends each year…

Read more »

Investing Articles

Could the IAG share price hit £2.11 in 2024?

According to analysts, the IAG share price could be headed for £2.11. But Stephen Wright wonders whether the stock is…

Read more »

Businessman use electronic pen writing rising colorful graph from 2023 to 2024 year of business planning and stock investment growth concept.
Investing Articles

1 hot UK growth stock I’m buying right now

I've more than doubled my money on this UK growth stock. But with a 948% boost to earnings, I think…

Read more »