The Covid-19 pandemic has proved disastrous for many businesses, forcing closures and driving down profits. One sector that has been hit hardest through persistent lockdowns is the retail sector, with government restrictions forcing retail closures worldwide. The opposite can be said for the online shopping industry, with online sales as a proportion of retailing reaching a record 22.3%. One such stock that has soared as a product of this is Ocado (LSE:OCDO).
A pandemic performer
Ocado’s earnings have risen 69% comparative to 2019-2020 performance, proving itself as a top FTSE 350 performer throughout the pandemic. Its share price has doubled in value as a result of persistent UK lockdowns and restrictions, as families have turned to online shopping. This has provided a profitable opportunity for many investors throughout 2020.
However, with the recent UK government announcement that much of the retail sector will be open by April and the majority of the adult population to be vaccinated by July, do I think Ocado will follow such a bullish trajectory throughout 2021?
2021 and beyond…
I think Ocado is set to see a decline in its online shopping sector revenues as competing firms open their doors back up to the public. However, with Ocado offering such a diversified business model, including tech solutions, engineering, and logistics, it certainly offers space to make up for a declining e-commerce role. In addition to this, I believe the 35% increase in revenue throughout 2020 isn’t likely to shrink back to the pre-pandemic levels of 11.5% per annum, meaning Ocado will remain a solid growth stock in future.
Though Ocado still currently operates at a loss, it boasts a pretty solid balance sheet, holding £2.1bn in cash to counteract debts of £997m. This shows the company can actively manage debt, which gives me confidence in its management. However, with a price to book ratio of 9.7, it could be considered significantly overvalued compared to competitors Tesco and Sainsbury’s who sit at 1.4 and 0.73 respectively. In addition to this, the company is not exempt to the impacts of Brexit, which is likely to pave the way for future inconvenience through potential food shortages and changes to the UK supply chain.
What would I do with Ocado shares?
Overall, though still currently slightly overpriced, I think that Ocado can still perform well in a post-pandemic world. Much of the public are likely to continue to use online shopping in the future, which will help counteract the risk of slower growth post lockdown.
CEO Tim Steiner has previously stated that Ocado’s target market is worth around £2.8tn, of which its current partners have only a £210m share of, providing plenty of room for further growth. Therefore, I think this stock is still worth buying and holding as a long-term investment in my portfolio in an increasingly online-driven retail sector.
Dylan Hood does not have any position in 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.