Suddenly the Ocado (LSE: OCDO) share price is smashing it. And about time too. It’s been smashed all over the place in recent years.
During the pandemic, as food delivery orders rocketed during lockdown, investors got it into their heads that Ocado was more than just a grocery chain.
This was a British tech champion in the making – a global player whose state-of-the-art, robot-driven customer fulfilment centres weren’t just impressive, but world class. Supermarkets were signing up from the US to Japan. The sky was the limit.
The technology was clever as can be. But there was a problem. Ocado had to spend heavily to deliver on its grand promises, while the pipeline of orders wasn’t always convincing. Losses piled up year after year, and investors started to fear further dilution as the company raised more money to stay afloat.
FTSE 250 loser turned winner
Ocado shares spiked past 2,500p in 2020, then collapsed almost 90%. I bought them last summer for just 414p, yet quickly found myself sitting on a 45% loss.
When I last wrote about Ocado on 14 July, I was bracing myself for another bombshell on half-year results day (17 July). I said I was expecting the worst, but hoping for the best. I got even better.
Ocado swung to a £611.8m statutory profit, reversing a £153.3m loss the year before. A profit! That was partly driven by a one-off £782.6m gain from deconsolidating Ocado Retail, but even so. The underlying trend’s encouraging with revenues up 13.2% to £674m.
Adjusted EBITDA surged from £52m to £91.8m, while its tech arm more than doubled operating profit to £72.8m. Management’s targeting 10% growth in technology sales this year and expects to be cash flow positive next financial year. Wow!
That last bit’s crucial. Ocado must start generating cash, because otherwise we’re back to dilution risk and nervous shareholders. If it can deliver, the shares could keep climbing. If not, the excitement could melt away again.
Exciting recovery stock
Let’s get some perspective here. Despite that 48% surge over the past month, the stock’s still down 18% over the last year and 84% over five. I’m still down 16%. But Ocado’s no longer stinking out my portfolio.
Naturally I’m delighted. This bounce may have justified my decision to hold on, but there’s still a long way to go. Ocado remains a high-risk, high-reward play.
It needs to keep selling its tech to big supermarket chains at a time when the global economy’s slowing and retailers are trimming investment. Labour shortages in logistics and rising energy costs could also weigh on progress.
Back on the radar
So what do the analysts think? Their median target price is 313.7p, almost 10% below today’s 345.5p. But I suspect those forecasts don’t reflect strong recent results and momentum.
There’s always the risk of a pullback as traders lock in gains or bail out after a brief bounce. I’ve seen that pattern before with Ocado.
If the board strugles to improve operating costs, cost profile and capital efficiency as planned, the recovery may stall. Yet I think the shares are still worth considering today, as long as investors understand the outsize risks.
Ocado’s still a binary stock. But investors can start to dream again.
