Should I buy Ocado shares after a 90% drop?

Ocado shares have taken a huge hit over the last three-and-a-half years, losing around 90% of their value. Should Edward Sheldon buy them now?

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Image source: Ocado Group plc

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Ocado (LSE: OCDO) shares have experienced quite a spectacular fall in recent years. Back in 2021, they were trading near 2,900p. Today (2 July) however, they are around 90% lower at 290p.

Is this an amazing opportunity to buy the shares for my portfolio? Or is this a risky stock to avoid? Let’s discuss.

Why the share price has tanked

Let’s start with a look at why the share price has crashed. The thing to understand about Ocado is that it’s not just a grocery delivery business.

Alongside its retail joint venture with M&S, it also offers end-to-end technology solutions that help other supermarkets move their operations online.

I’ve always thought Ocado’s technology solutions division has a lot of potential. After all, the world is only going to become more digital in the years ahead.

The problem is, this division’s losing money hand over fist at the moment. This year, Ocado is expected to generate a net loss of £335m. That’s after a net loss of £314m last year.

In a high-interest-rate environment, these losses have really hurt the stock. Investors just don’t have the patience to wait for profits anymore.

Recent news that Canadian supermarket Sobeys has put a new warehouse in Vancouver on hold hasn’t helped. This led to a number of brokers cutting their price targets (Morgan Stanley lowered its target to 215p from 345p), which also put pressure on the share price.

Should I buy now?

Taking a long-term view, I continue to believe that Ocado has potential from an investment perspective. However, I’m not in a rush to buy the stock today.

While the company’s revenues continue to rise (analysts expect top-line growth of about 8% this year), the big losses are a turn-off for me. I’d like to see some evidence that profits are on the cards in the near future. With no earnings, it’s hard to accurately value the company.

The nasty share price downtrend is a turn-off too. Where it ends is anyone’s guess. One thing I’ve learnt over the years is that trends can stay in place for a while and trying to fight them can backfire. Note that if Morgan Stanley’s analysts are right, there could be another 25% to fall.

One other issue here is that the company’s currently engaged in a spat with M&S on the retail side of its business. M&S says it shouldn’t have to make a final payment of £191m to Ocado because the online grocery company’s performance has been poor.

Overall, the company – and the stock – are a bit of a mess right now. So I won’t be buying any shares in the near term. Why take the risk on Ocado when there are so many other shares that are performing really well (and making long-term investors like myself money) in the current bull market?

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.

Edward Sheldon has no position in any of the shares mentioned. 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.

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