There’s an old saying that a picture paints a thousand words. I think this is particularly relevant when studying the five-year share price chart for Ocado Group (LSE:OCDO). Just look below — I don’t think I need to write anything.
But is the stock now trading in bargain territory? Or is the writing on the wall? Let’s take a closer look at both sides of the debate.
A bullish view
Ocado has invested heavily in some very impressive technology. But like many pioneers, it sometimes takes longer than anticipated to deliver results. However, the group’s losses are narrowing. And it expects to be cash flow positive at some unspecified point before the end of 2026. It’s then aiming to maintain this throughout 2027.
Some of this improvement is due to an expectation that eight automated warehouses will go live in Poland, the US, South Korea, and Spain over the next three years. Most existing partners are also growing their operations. Therefore, an increase in the number of live modules (a measure of capacity) is also predicted.
On the retail side, when announcing its results for the 26 weeks ended 1 June, it reported that its joint venture with Marks & Spencer (M&S) was the fastest-growing grocer in the UK market. In fact, one of its vans may have delivered the food you are eating today (25 December). However, although it retains a 50% interest, the results of the business are no longer consolidated in the group’s accounts. As M&S now has effective control, Ocado only records its share of the result as a single line item in its financial statements.
A bearish view
On the other hand, Ocado is one of the most volatile stocks on the UK market. According to the Financial Times, it has a beta value of 2.8. This means if the stock market goes up or down by 10%, Ocado’s share price will – on average – move by 28%.
This is great if things are going well but the group’s just received some bad news from the US, which could call into question its business model.
Kroger, the country’s largest grocery chain, has decided to close three of the eight customer fulfillment centres that it operates in partnership with Ocado. The UK group will receive a one-off payment of $350m in compensation. But the closures will reduce revenue by $50m in its December 2026 financial year. And if Kroger reckons it’s better – presumably cheaper — to use its own stores as distribution hubs, what’s to stop others doing the same?
On reflection
To be honest, if the group was operating in another sector, I suspect it would either have gone bust by now, merged with a larger company or been taken private and its shares de-listed. But because Ocado’s able to brand itself as a technology company – rather than an ‘old-fashioned’ grocery retailer – it appears to be given the benefit of the doubt by investors.
However, to be a viable investment, I’ve always believed that irrespective of what industry a company is operating in, it should either be profitable or on a clear path to being consistently in the black. In the case of Ocado, neither applies. That’s why I don’t want to invest. Instead, I believe there are better opportunities available by taking positions in profitable companies in other sectors.
