Should I buy after Ocado share price leaps 6%?

With a new deal in the bag, is the Ocado Group plc (LON: OCDO) share price march unstoppable?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Ocado Group (LSE: OCDO) has always seemed something of an enigma to me. The company started out as simply an online supermarket, at a time when Tesco and the rest were seeing demand for their home delivery services rising strongly.

At flotation in 2010, the shares were strongly subscribed and the price soared way above what seemed to me like a rational valuation.

Admittedly, Ocado doesn’t have the overheads of a large chain of stores to deal with and delivers solely from its warehouses. But I couldn’t see where the profit was going to come from to justify that early share price.

Eight years on, the share price has climbed a lot further. At 1,308p at the time of writing, Ocado shares are up nearly 150% in just the past 12 months, so what’s happened?

It’s down to partnerships, with the firm’s recent tie-up with Marks & Spencer (LSE: MKS) providing a big boost.

New contract

The latest news Tuesday is of another deal, this time with Australia’s Coles Group to develop its online groceries business based on the Ocado Smart Platform. If you don’t know who Coles is, it’s one of Australia’s biggest retailers and already commands online sales of around A$1bn a year.

But Ocado still isn’t making any profit, and there’s none on the cards as far as forecasts go. So how can we justify the lofty share price?

Well, it’s all about that Ocado Smart Platform thing. Ocado isn’t an online supermarket any more, it’s a technology provider — and we all know technology shares can keep climbing regardless of profits. Oh, hang on, I’ve just remembered what happened last time.

Ocado may well prove successful by licensing its technology and its patents, but until there are some profits and some way of quantifying the firm’s value, I’m steering well clear.

Strategy shift

Speaking of Marks & Spencer, that’s another I’ve always seen as somewhat enigmatic. For decades, the company has enjoyed roaring sales in its food division but has struggled to keep up with clothing trends, so it’s focused most of its efforts on the latter — but with little success.

Despite its best efforts, M&S’s earnings have been unexciting, and have actually been falling for the past couple of years. But a 40% share price slump in five years has dropped the stock’s P/E valuation as low as 10, and pushed dividends up to more than 6%. For an investment, you could certainly do worse than that.

But things are up in the air again after M&S announced its tie-up with Ocado, focusing on the part of its business that it actually does best.

Raising cash

The deal involves Marks & Spencer shelling out £750m for a 50% stake in Ocado’s UK retail business, and that will be paid for by a combination of a £600m rights issue and a cut in the dividend.

Something that immediately springs to mind is that M&S is buying into Ocado at a time when Ocado shares are soaring, funded by a rights issue at a time when M&S shares are close to a five-year low — but I guess that’s timing for you.

Would I buy M&S shares now? Not with the new uncertainty. But then, I wouldn’t have bought them before the Ocado deal, not when there are so many better options out there.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has recommended Tesco. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Young mixed-race couple sat on the beach looking out over the sea
Investing Articles

I’d put £20K in an ISA now to target a £1,900 monthly second income in future!

Christopher Ruane shares why he thinks a long-term approach to investing and careful selection of shares could help him build…

Read more »

Mature couple at the beach
Investing Articles

6 stocks that Fools have been buying!

Our Foolish freelancers are putting their money where their mouths are and buying these stocks in recent weeks.

Read more »

Black woman using loudspeaker to be heard
Investing Articles

I was right about the Barclays share price! Here’s what I think happens next

Jon Smith explains why he still feels the Barclays share price is undervalued and flags up why updates on its…

Read more »

Investing Articles

Where I’d start investing £8,000 in April 2024

Writer Ben McPoland highlights two areas of the stock market that he would target if he were to start investing…

Read more »

View of Tower Bridge in Autumn
Investing Articles

Ahead of the ISA deadline, here are 3 FTSE 100 stocks I’d consider

Jon Smith notes down some FTSE 100 stocks in sectors ranging from property to retail that he thinks could offer…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

Why I think Rolls-Royce shares will pay a dividend in 2024

Stephen Wright thinks Rolls-Royce shares are about to pay a dividend again. But he isn’t convinced this is something investors…

Read more »

Investing Articles

1 of the best UK shares to consider buying in April

Higher gold prices and a falling share price have put this FTSE 250 stock on Stephen Wright's list of UK…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

The market is wrong about this FTSE 250 stock. I’m buying it in April

Stephen Wright thinks investors should look past a 49% decline in earnings per share and consider investing in a FTSE…

Read more »