Nobody buys Ocado (LSE: OCDO) shares expecting an easy life. I bought them 18 months ago after they dropped 85%, thinking they surely must be a bargain now. Then I quickly found myself sitting on a 45% loss.
Yet I resisted the temptation to sell. While the company was still banking a loss year after year, I noticed the shares often jumped on results day, which tended to produce slightly better numbers than the market expected.
In between, the price would drift lower and get hit hard by any negative macro news such as higher inflation and rising interest rates. That’s how it is when a business has big debts to service while also making a loss.
FTSE 250 stock is flying
Those upbeat bursts made me think the stock wasn’t dead yet and could rocket if the right news landed. And that’s exactly what’s happened. The Ocado share price has surged 68% in the last month. My loss has shrunk from 45% to just 6%. One more day like yesterday’s 8.5% jump and I’ll actually be in profit. Break out the bunting!
On 25 July, I called Ocado “the ultimate binary play” and warned it could either fly or crash. Right now, it’s flying. No guarantee it will last, of course.
Big profit swing
When the half-year results landed on 17 July, the turnaround was dramatic. Revenues for the six months to 1 June rose 13.2% to £674m, with Technology Solutions up 14.9% and Ocado Logistics up 12.1%.
The statutory profit was eye-catching at £611.8m, compared with a £153.3m loss last year. However, that was partly thanks to a one-off £782.6m gain from deconsolidating Ocado Retail. Technology Solutions more than doubled operating profit to £72.8m, with margins leaping from 14.4% to to 26.3%. Management expects to be cash-flow positive next financial year, which I hadn’t seen coming.
On 1 August, JPMorgan Cazenove gave it a further lift by reiterating its Overweight rating citing improved operational performance and a pipeline of eight new customer fulfilment centres due between 2025 and 2027. It’s new target price is 437p. That’s 12.5% higher than today’s 387.8p.
Still a risky recovery play
At the end of 2024, net debt stood at £1.2bn versus equity value of around £1.9bn. That looked daunting then, less so with the market cap surging to £3.2bn. At the current stellar rate of growth, it could even recover its place in the FTSE 100. There’s plenty of scope for growth if Ocado delivers on its ambition to be a global tech player, but execution risk remains high.
While last month’s rally is thrilling, the share price remains down 2% over 12 months and 83% over five years. It now trades on a price-to-earnings ratio of 7.6, which looks cheap, although I’m not convinced that’s a reliable measure for such a volatile stock.
Look at that growth
A £10,000 investment one month ago would now be worth £16,800, but Ocado remains vulnerable to market swings, and in any broader market sell-off, it could fall faster than most.
This is still a binary stock. Investors with a high tolerance for risk and a long-term perspective might consider buying today, but must be prepared for sharp short-term losses. For now, I’m holding, enjoying the moment, and hoping the recovery has further to run.
