The Ocado (LSE: OCDO) share price started the year off by rising 25% in just two weeks. Then it lost more than 50% of its value over the next six months, before a jaw-dropping 190% rally during the summer. Now it’s down 31% in the last month alone!
What has been causing this huge share price volatility?
A significant downgrade
Will Ocado’s robot-operated warehouses make it the ‘Tesla of grocery’ and help power massive profits? Or will it be posting losses forever and a day?
After more than 20 years in business, nobody knows for sure. Especially the stock market, and that’s the issue here.
This uncertainty was exacerbated in September when the stock was downgraded by Andrew Glynn, an analyst at BNP Paribas‘ equity broker Exane. He was worried about slow growth in Ocado’s retail business.
However, Exane had only upgraded the shares in June, citing a favourable risk/reward balance. But then it came back and stated that Ocado’s risk/reward setup was “out of kilter again”.
Ocado shares fell 20% on the day of this downgrade — their worst fall in 11 years.
Other factors at play
Beyond this, there have been other recent developments weighing on the stock.
First, investors have been digesting the likelihood that interest rates will stay higher for longer. This has knocked market sentiment for the shares of unprofitable growth companies (like Ocado).
Second, supermarket Iceland launched on the Amazon website in mid-September. This means thousands of its products can be delivered to Prime subscribers, with the e-commerce giant delivering from Iceland stores.
Amazon already has similar third-party deals with Co-op and Morrisons. And yesterday (8 October), The Sunday Telegraph reported that Waitrose is also in talks to do something similar with Amazon.
This is direct online grocery competition for Ocado in its home market, which is something worth monitoring.
Why I’m invested
Also in September, Ocado announced that quarterly revenue at its 50:50 joint venture with M&S was up 7.2% year on year to £569.6m. Active customers grew 1.5% to 316,000, which is encouraging.
However, volumes were down overall in the quarter, with growth coming by way of price rises. But prices have since been cut, so I have no idea about the direction of profitable growth here, to be honest.
For me as an investor, it’s all about the fast-growing Solutions division. This is the end-to-end, online grocery platform that makes money from third-party retailers. Global partners using these robotic warehouses include Kroger and Coles.
Rapid growth here will have to continue to justify loss-making Ocado’s £4.6bn market cap.
Buying in thirds
I only invested in Ocado stock in August and that holding is already 28% in the red.
While that’s not a great start, it merely confirms why I don’t usually put all my money in a stock upfront. If I invest and the share price drops 50% in a matter of weeks, then it would need to double again for me to get back to even. And that may take years, if ever.
So I tend to buy in three installments, assuming my reasons for investing haven’t changed, which they haven’t here. This is a strategy known as pound-cost averaging.
Therefore, I’ll be adding to my holding again, probably before the first trick-or-treaters start knocking.