As the coronavirus crisis continues, speculation is growing that the government could announce a second national lockdown to control the spread. This could have significant implications for the stock market, although some companies would fare better than others. The Ocado (LSE: OCDO) share price is one investment that may produce large returns for investors in the event of a second wave.
Is the Ocado share price undervalued?
Many investors, including myself, may recoil at buying Ocado shares at current levels.
Indeed, the stock looks highly overvalued right now. The company as a whole is worth over £22bn, but it is not profitable. And analysts don’t expect this to change. They’re forecasting losses for at least the next two years.
However, despite Ocado’s losses, the company’s top line is exploding. Revenue is projected to hit £2.3bn in 2020, up from £1.7bn in 2019. It will hit £2.6bn by 2021 according to current projections.
A second lockdown could help the business beat these forecasts. In the second quarter of 2020, demand for Ocado’s services surged as customers flocked to the company’s online offering. Demand was so high that the business had to stop taking on new customers.
This time around, Ocado may be better prepared. The business has hired thousands of new staff and knows what to expect. A second lockdown may lead more customers to the company. These new customers may stay with the group rather than returning to old providers.
Considering the company’s growing importance in the UK grocery market, I think the Ocado share price could be an excellent long-term investment. As more and more customers rely on the business to provide their weekly shop, the group’s profit margins should increase thanks to economies of scale.
As such, while analysts might not be expecting any profits from the business in the next two years, in the medium term, I reckon Ocado has the potential to become a highly profitable enterprise.
That’s without considering the group’s technology. Ocado’s robotic warehouses are in demand. The coronavirus crisis has made it clear that retailers cannot always rely on humans. This could accelerate the demand for the firm’s technology in the years ahead.
As other retailers around the world rush to automate their supply chains, the Ocado share price may benefit.
The bottom line
All in all, the combination of the company’s grocery business, and its technological expertise, seem to suggest that the outlook for Ocado shares is bright.
As the company continues to capture market share in the UK grocery market, it should benefit from economies of scale, which could drive profit growth in the medium term.
At the same time, rising demand for the company’s technology may provide much-needed cash flow to help the business’s drive for growth here in the UK.
I reckon these tailwinds will help drive the Ocado share price higher.
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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.