The Motley Fool

Ocado shares are falling today. Is this FTSE 100 firm’s bubble finally bursting?

Image source: Getty Images.

Shares in online supermarket Ocado (LSE: OCDO) were down over 5% in early trading this morning. That’s despite the business releasing a set of fourth-quarter figures that would turn most FTSE 100 firms green with envy. 

Is my long-held suspicion that the shares are overbought finally ringing true, or is this a mere short-term blip?

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US$12.3 TRILLION out of thin air…

And if you click here we’ll show you something that could be key to unlocking 5G’s full potential...

Ocado sales soar

This morning’s numbers relate to Ocado’s retail arm — the joint venture it formed with battered former FTSE 100 member Marks & Spencer back in February 2019.

Thanks in part to another lockdown, retail revenue soared 35% over the 13 weeks to 29 November to just under £580m. According to the company, this compares favourably to the normal peaks and troughs experienced before the coronavirus arrived. It also suggests customers have been receptive to the firm’s switch in trading partners, to M&S from Waitrose in September.

Ocado received an average of 360,000 order per week over the period — up 3% from Q4 2019. Despite the additional demand, it was able to achieve “high rates of on-time customer delivery and low rates of substitutions,” according to Retail CEO Melanie Smith. The average order size was £133 — evidence, Ocado believes, that shoppers’ behaviour was continuing to “normalise.

Priced in?

It seems fair to say Ocado shares have been one of the better FTSE 100 buys in 2020. Those placing the stock in their shopping basket at the beginning of January would be sitting on a gain of around 75%. That’s after taking today’s fall into account! The question is, how much of this good news is now priced in?

Based on this morning’s reaction. I’d say quite a lot, especially as the company raised earnings guidance again today. It now expects full-year earnings to be “over £70m” compared to its previous prediction of over £60m. And yet traders weren’t impressed!

Part of this may be explained by the fuzzy outlook. Within today’s statement, Ocado said sales and earnings growth in the next financial year will depend on how quickly trading normalises. It’s also dependent on when three new warehouses become operational. These are expected to add 40% more capacity to the business.

Market minnow

But is this reaction really that surprising? After all, Ocado is still trading at a loss, due to the huge investment it’s needed to make over the years. As impressive as its operations are, the FTSE 100 company is already valued at over £17bn. That’s the sort of staggering valuation we’d expect from flash (overhyped) US tech stock. Sure, Ocado might utilise market-leading software, but no share is worth buying at any price. 

On top of this, it’s worth remembering Ocado doesn’t operate in a vacuum and the grocery market remains as cut-throat as ever. Depending on how the UK economy fares in 2021, it’s possible more people will switch away from M&S to cheaper options out of necessity.  

It’s not as if Ocado has a commanding presence either. In November, it had just a 1.7% share of the UK market, according to Kantar. FTSE 100 peer Tesco, on the other hand, had 27%. Its valuation is £22bn — only £5bn more than Ocado. 

Considering the above, I’m still giving Ocado shares a wide berth as an investor. For me, there are far better opportunities elsewhere in the market. The bubble may finally be bursting.

A Top Share with Enormous Growth Potential

Savvy investors like you won’t want to miss out on this timely opportunity…

Here’s your chance to discover exactly what has got our Motley Fool UK analyst all fired up about this ‘pure-play’ online business (yes, despite the pandemic!).

Not only does this company enjoy a dominant market-leading position…

But its capital-light, highly scalable business model has previously helped it deliver consistently high sales, astounding near-70% margins, and rising shareholder returns … in fact, in 2019 it returned a whopping £150m+ to shareholders in dividends and buybacks!

And here’s the really exciting part…

While COVID-19 may have thrown the company a curveball, management have acted swiftly to ensure this business is as well placed as it can be to ride out the current period of uncertainty… in fact, our analyst believes it should come roaring back to life, just as soon as normal economic activity resumes.

That’s why we think now could be the perfect time for you to start building your own stake in this exceptional business – especially given the shares look to be trading on a fairly undemanding valuation for the year to March 2021.

Click here to claim your copy of this special report now — and we’ll tell you the name of this Top Growth Share… free of charge!

Paul Summers has no position in any of the shares 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.

Our 6 'Best Buys Now' Shares

The renowned analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.

So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply enter your email address below to discover how you can take advantage of this.

I would like to receive emails from you about product information and offers from The Fool and its business partners. Each of these emails will provide a link to unsubscribe from future emails. More information about how The Fool collects, stores, and handles personal data is available in its Privacy Statement.