The last five years have been a phenomenal period for many UK growth stocks. Sadly, Ocado (LSE:OCDO) isn’t on the list of winners. A combination of mounting losses and rising costs have soured investor appetite for the online grocery & warehouse automation business. So much so that it lost its FTSE 100 status with shares falling a painful 90% since July 2020!
However, with the stock now trading at its lowest point since 2017 and cash outflows getting slashed in half during 2024, could Ocado’s fortunes finally be turning around?
Digging deeper
Since the start of 2025, Ocado shares’ downward trajectory has continued with another 27% clipped off its market-cap.
The story’s much of the same for the last few years. Its operating cash flow and net bottom line are still firmly in the red. At the same time, the firm’s seemingly struggled to attract new large customer contracts for its flagship warehouse automation technology. And management continues to shift away from its legacy online grocery business, relinquishing operational control to Marks & Spencer, despite improving performance.
With that in mind, it’s not so hard to understand why investors are seemingly getting nervous. Yet, this weak sentiment may soon become unwarranted. The lack of a recent new contract is concerning, but the company still has plenty of work in its pipeline.
Seven new fulfilment centres are currently being developed over the next three years. And as the benefits of these new facilities emerge, paired with a friendlier interest rate environment, automation investments from customers could increase naturally, boosting demand.
Meanwhile, the company’s becoming more streamlined, as evidenced by the significant improvement in cash outflows. And if management’s projections are correct, Ocado could be turning cash positive as early as 2026. That’s a significant milestone on the firm’s journey to becoming financially independent from third-party lenders.
Pairing all this with a price-to-underlying earnings ratio of 12.8, the growth stock seems to be attractively priced for a business that’s still delivering double-digit revenue expansion.
What to watch
While operations continue to burn through cash, Ocado’s balance sheet’s at risk. To management’s credit, it does have around £770m of cash & equivalents in the bank to keep the lights on. And once free cash flow re-enters the black next year, the group’s £1.7bn debt pile can be trimmed.
Having said that, there’s no guarantee of a restoration of free cash flow in 2026. Higher energy costs and weaker consumer spending both indirectly negatively impact Ocado’s robotics business. So it’s entirely possible that the growth stock could fall further from current levels.
In my opinion, Ocado’s risk profile drastically drops once free cash flow has been restored to positive territory. At which stage, if the share price continues to underperform, then a closer inspection starts to be more tempting. Until then, I’ll be patiently waiting to see if management can deliver on its targets.
