Down 20% this month, can this struggling FTSE 100 stock recover?

Shares in delivery company Ocado are down considerably this month, continuing a multi-year trend. Is there still hope for this FTSE 100 stock?

| More on:

Image source: Getty Images

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.

Checking the performance of share prices on the FTSE 100 can often be confusing. Usually, a share price is a fairly good indicator of how well a company is performing. But now and then, a price will drop to extremely low levels for no obviously logical reason. This prompts the question: is it a great buying opportunity, or is the company doomed to fail?

I noticed one share that’s down 25% in the past month, so I decided to investigate. 

The digital delivery giant

Ocado (LSE:OCDO) is a popular UK online retail service, providing door-to-door delivery of items from top brands like Marks & Spencer and Harvey Nichols. For many years, it’s been one of the UK’s leading options for the delivery of groceries and household items. During pandemic-era lockdowns, it saw a huge increase in demand, causing the share price to triple over six months to almost £30.

However, as lockdowns eased, things began to take a turn for the worse. Rather than return to pre-pandemic levels of around £10, the share price has collapsed to a mere £3.54.

Financials

Despite the worsening outlook, Ocado actually exceeded analysts’ expectations in its most recent 2023 full-year earnings results. It reported a 39p loss per share, up from a 59p loss in 2022, and revenue of £2.83bn, up 12% from last year. These figures exceeded analyst expectations by 22% and 2.9%, respectively.

And while the company recorded a net loss of £314m, this was still 31% narrower than last year. Profit margins have improved to -11% from -18% earlier in the year. The balance sheet looks decent too. Its assets outweigh its liabilities and although it carries £1.46bn in debt, this is sufficiently covered by £1.5bn in equity.

Overall, it would appear its financial position is improving, yet the share price continues its downward spiral. With a market cap that’s now fallen below £3bn (from £6.8bn last December), it’s at risk of losing its place in the FTSE 100.

So what’s the problem?

One hint might be the discrepancy between revenue and income. While Ocado’s revenue has been growing steadily for several years, its net income has been falling consistently. That’s not entirely unusual for a new tech company that’s spending excessively on new infrastructure and assets. While the company is over two decades old, some of the extra expenditure may be focused on development of its Smart Platform system.

FTSE 100: Ocado Revenue and Income
Created on TradingView.com

Some losses could also be attributed to a strained partnership with M&S. In February, the company withheld a £197m payment to Ocado after the joint venture allegedly failed to provide the expected results. But the share price had already been declining for months prior to the news so it’s hard to quantify the effect.

The bottom line

With a solid balance sheet, consistent flow of revenue and improving losses, I see no reason Ocado won’t recover eventually. The company appears to be overspending and may have incurred some unexpected losses on failed partnerships but is otherwise in good shape.

The share price could still fall further from here but I believe there’s good potential for a recovery in the long term. But just how long that will be, is unclear. For now, I’d tread with caution.

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.

Mark Hartley has positions in Marks And Spencer Group Plc. The Motley Fool UK has no position in any of the shares mentioned. 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

Investing Articles

Here’s how I’d target a £5,900 second income by investing £50 a week

We don't need a huge pile of cash to earn a second income. Here's one way I'd aim for it…

Read more »

Grey cat peeking out from inside a cardboard box in a house
Investing Articles

Recently released: May’s small-cap stock recommendation [PREMIUM PICKS]

We believe the UK small-cap market offers a myriad of opportunities across a wide range of different businesses and industries.

Read more »

Warren Buffett at a Berkshire Hathaway AGM
Investing Articles

I’m listening to Warren Buffett and buying bargain shares!

Our writer has been taking lessons from the investing career of Warren Buffett. Here's how he's using it to try…

Read more »

Close-up of British bank notes
Investing Articles

Here’s how I’d spend £6,900 on income shares to try and earn £500 per year

Christopher Ruane outlines some of the investment principles he'd apply when trying to earn £500 of dividends annually by spending…

Read more »

Newspaper and direction sign with investment options
Investing Articles

My 3 picks for the best UK shares to buy in June

Mark David Hartley is bullish about the UK stock market right now. He reckons these are the three best shares…

Read more »

Young Asian man drinking coffee at home and looking at his phone
Investing Articles

23% per annum: is this FTSE 250 stock too good to turn down?

FTSE 250 constituent Games Workshop has posted an impressive return over the last five years. This Fool takes a closer…

Read more »

Arrow symbol glowing amid black arrow symbols on black background.
Investing Articles

Up 60% in a month, could this UK share keep soaring?

After this UK share surged by almost three-fifths in a matter of weeks, this writer has been re-examining the investment…

Read more »

Young brown woman delighted with what she sees on her screen
Investing Articles

I’m up 25%! The Nvidia share price and other giants power this UK investment trust

I drip-fed some money into this not-so-buoyant UK investment trust and now the Nvidia share price is helping to drive…

Read more »