The Ocado (LSE: OCDO) share price was one of the best performing investments in the FTSE 100 last year. I believe this performance will continue in 2021. Even though the stock is up 116% in 12 months, I think the retailer’s growth is only just getting started.
Ocado share price outlook
Over the past year, the UK retail market has undergone a drastic change. The coronavirus pandemic has forced consumers online, in turn forcing companies to adapt. Tens of thousands of new jobs have been created to service online deliveries, and it doesn’t look as if the market is ever going back to the way it was.
Consumers have realised how easy and straightforward it is to shop online. Companies have stepped up to the challenge, investing hundreds of millions of pounds developing infrastructure to meet orders on time. Now this infrastructure’s in place, I don’t think we will go back to the way we shopped before. It’s now much easier and potentially faster to shop online.
Ocado was one of the pandemic’s main winners as its entire business model is based around online retailing. This puts the business in a great position to continue to grow in the long term. Unlike other retailers, robots form the backbone of Ocado’s delivery infrastructure. While these machines have been expensive to set up, the company is now starting to see the benefits through economies of scale.
According to Ocado’s financials, its UK retail business saw earnings before interest tax depreciation and amortisation (EBITDA) of £45.7m in the first half of 2020. That implies an EBITDA margin of 4.5%, up from 3% in the same period last year.
These numbers suggest that, as the retailer’s top line continues to expand, profits may grow even faster. This could send the Ocado share price surging.
Beating the FTSE 100
Figures suggest the company’s sales have continued to pick up over the past few months. According to data from Kantar, UK consumers spent a record £11.7bn over the Christmas period at supermarkets.
Online orders accounted for 12.6% of grocery spending during the month compared with 7.4% a year earlier. The fastest growing part of the market was Ocado’s UK joint venture with Marks & Spencer. Kantar estimates sales increased by 36.5%.
And this could be just the start. Ocado only accounts for 3% of the UK grocery market. I think that gives the business a long runway for growth. There’s nothing stopping the group from doubling its market share if it can meet the demand of consumers. This suggests the firm’s profit margins will continue to expand and support further positive growth of the Ocado share price.
That’s why I think the stock could outperform the FTSE 100 in 2021. Ocado is firing on all cylinders and the market share is there for the taking, if the business can rise to the challenge.
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Rupert Hargreaves 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.