In December, it’s a good time of the year to review the performance of companies for the calendar year. Not only that, but it’s the time when many analysts start to put out their forecasts for 2025. Here’s one FTSE 250 stock that has performed badly in 2024, but that I think could have a much better year ahead.
Problems this year
I’m talking about Ocado Group (LSE:OCDO). The stock has fallen by 47% over the past year, making it one of the worst performers in the FTSE 250 over this period.
One reason for this was the continued loss-making nature of its operations for this year. The H1 2024 results showed a reported loss before tax of £154m. It’s true that this was a smaller loss than the same period in 2023 (£290m). But ultimately it is still a loss. Given the fact that the reported earnings per share has been negative for several years now, I think some investors decided to throw in the towel and look for opportunities elsewhere.
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Another factor behind the disappointing performance was the headache earlier in the year with a dispute with Marks & Spencer. The 50:50 deal that both entered into for the online food joint venture started in 2019. At the start of 2024, Ocado threatened legal action, saying that £190m of a final payment wasn’t paid. I feel the sad thing here is not so much the specifics, but rather that it might put off other companies wanting to work with Ocado in a similar joint venture.
Continued growth
Despite these issues, I think the stock could be primed for a comeback next year. One reason this could happen is due to the business reaching scale. With growth stocks, losses are often posted in the early days. However, as the firm gets larger it can benefit from economies of scale.
For Ocado, the H1 report showed that all three main divisions grew revenue. This ranged from 5.6% for Logistics through to 21.8% for Technology Solutions. The CEO also noted that “we support thirteen of the world’s leading grocers to grow their online business with our technology”.
I feel that it’s only a matter of time before the strong demand and revenue growth filters down to a bottom line profit. The group loss before tax of £153.9m was almost £140m smaller than H1 2023. So it’s definitely not out of the question for the loss to shrink by another £140m, which in turn would see the firm close to breaking even.
An AI slant for 2025
Let’s note forget about Ocado’s use of artificial intelligence (AI). It extensively uses the technology in its fulfilment centres and with supply chain management. I feel investors will start to look beyond the well-known AI-related stocks next year and target ones that have been ignored so far, such as Ocado.
Of course, the problems from this year could continue in 2025 and this is the main risk to my view. Yet I do feel the stock is starting to look cheap, so am seriously thinking about adding it to my portfolio before year-end.
