Here’s why I wouldn’t touch Ocado shares with a bargepole

After an upbeat quarterly trading statement for its retail business, our writer still has no interest in buying Ocado shares. Here’s his rationale.

| More on:

Image source: Ocado Group plc

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

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.

With a trading statement for its retail venture published today (26 March), there was some good news for Ocado (LSE: OCDO). Retail revenues for the FTSE 100 company showed double digit percentage growth compared to the same period last year. Yet despite this, I would not dream of buying Ocado shares for my portfolio at the moment.

So why not?

Reading a company’s accounts

As an investor, knowing how to read company accounts is an important skill. On one hand, what is sometimes known as the top line is important. That is a company’s revenue.

If revenue is growing, that can prove a company is serving an ongoing market and that customers are willing to spend money on its products or services.

Ocado’s quarterly revenue growth in its retail division was strong. In fact, the whole company has shown strong revenue growth for a number of years.

Source: TradingView

But revenue is only one part of a company’s accounts. Under the top line in the accounts are listed items such as operating costs, interest, rents payable, and so on. Once that is all deducted we get what is known as the bottom line. In other words, a company’s profit or loss.

Here, Ocado is less impressive. The company made a £387m loss after tax last year. It has been lossmaking for most years of its life as a listed company, so far.

This chart shows its net income.

Source: TradingView

Ouch!

What this means for the shares

Is such a loss unusual? Not necessarily. Ocado is still building its business model, both metaphorically and literally.

The cost of constructing distribution centres to service its grocery clients like US giant Kroger is expensive. But once they are built they can (hopefully) help the company serve clients for decades.

While Ocado’s retail partnership with Marks & Spencer may be helping fuel growth in that division, the company overall continues to plough money into selling its tech and logistics solutions to other retailers.

When it comes to Ocado shares, that has translated into sizeable losses per share in recent  years.

Source: TradingView

Ocado shares have collapsed 65% in the past five years but the company still has a market capitalisation of £4bn.

Lots to prove

Is it worth that? Possibly. Ocado’s technology is world class, as is shown by its client list of leading global retailers. If it can reduce spending once its infrastructure is in place, the large losses could yet be left behind. Meanwhile, the retail business has the wind in its sails.

For now though, Ocado still feels a long way from profitability. It remains to be proven whether the business model can ever turn a consistent profit.

Although the retail arm is growing revenues strongly, Ocado and Marks & Spencer have been in a dispute about payment. I fear that suggests the working relationship is far from smooth. That could be problematic for the future development of the business.

It has yet to prove its overall business model, in my opinion. I have zero interest in investing until it does.

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.

C Ruane 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

Young Caucasian woman holding up four fingers
Investing Articles

7%+ dividend yields! 4 FTSE 100 shares for investors to consider buying in April

These FTSE shares offer dividend yields comfortably above the index average of 3.7%. Here's why they could be good passive…

Read more »

Dividend Shares

£10k in an ISA? Here’s how to generate a ton of passive income

Passive income can provide a lot more financial freedom and security. Here’s an easy way to generate some within an…

Read more »

Investing Articles

The Aviva dividend yield’s already over 7%. Could it go higher?

Christopher Ruane explains why he thinks the Aviva dividend could be on course to grow this year and beyond. Might…

Read more »

BUY AND HOLD spelled in letters on top of a pile of books. Alongside is a piggy bank in glasses. Buy and hold is a popular long term stock and shares strategy.
Investing Articles

2 shares I’d buy to try and double my money in 10 years

Stephen Wright thinks there are still opportunities to to buy UK shares that can double in value over the next…

Read more »

Three signposts pointing in different directions, with 'Buy' 'Sell' and 'Hold' on
Investing Articles

NIO stock has crashed! Here’s why I still wouldn’t touch it with a bargepole

I've been watching NIO stock falling heavily, and wondering when might be a good time to get in cheaply. Here's…

Read more »

Investing Articles

Why have Rolls-Royce shares fallen this week?

Rolls-Royce shares remain the best performing on the FTSE 100 over the past year, but there's been some pullback. Dr…

Read more »

Investing Articles

With a 4.3% yield, I consider this FTSE company an exceptional investment

Oliver Rodzianko say this FTSE company is focused on quality and long-term survival. As such, he thinks he'll hold it…

Read more »

Investing Articles

How I’d invest £10,000 in a Stocks & Shares ISA and aim for a £45,500 second income

Millions of us aren’t earning the second income we deserve. Here, Dr James Fox explains how he’d get his savings…

Read more »