Can the Ocado share price start rising again?

Ocado is one of the biggest FTSE 100 losers in today’s trading after posting a weak trading update. Is this the dip to buy into or a red flag?

| 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.

Stack of British pound coins falling on list of share prices

Image source: Getty Images

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.

It is a disappointing day for investors in Ocado (LSE: OCDO). The FTSE 100 e-grocer’s share price has dropped from yesterday on a weak update it posted earlier today. 

Trading update

A fire at its Erith customer fulfilment centre in July meant that it had to cancel orders and had less capacity to offer slots to new customers. This showed up in a 10.6% revenue decline for its June-August quarter compared to last year. 

To understand how far the fire is responsible for this decline, it is helpful to estimate the loss because of it. Ocado has provided a number of £35m. After I add the number to the actual revenue for the quarter, it is still less than last year’s figure by 4.5%. This means, that more than half the gap in revenue can be explained by a correction after the easing of restrictions. This is further supported by the fact that even for the six weeks before the fire, Ocado’s revenues were down by 1.8% .  

Why I’m optimistic about Ocado

However, there are three aspects to the update that make me optimistic. First, some of the revenue loss can be explained by a reduction in the average size of the customer basket, which it mentioned in the update, and not the loss of actual customers. This was to be expected, since we are now spending less time indoors and are less dependent on at-home consumption.

Second, it continues to add to its customer base, indicating ongoing expansion of its services. This suggests the potential for the company to bounce back from the latest revenue setback. In fact, it expects to deliver “strong revenue growth in FY22”. 

Third, it says in its update that Marks & Spencer (M&S) products now accounts for 29% of its order basket number. I would have been on the fence about this development at any other time, considering that the retailer has been struggling for a while. Not now, however. M&S recently reported an unexpectedly big increase in revenues and even upgraded its profit guidance for the year. This bodes well for Ocado too.

My takeaway

Despite this, the company’s share price has dropped some 20% in the past year. Some softening was due, going by the scorching growth seen last year. Because Ocado was one of the few FTSE 100 gainers in the lockdown, there was great demand for its stock, driving its price to all-time-highs. But I think a pick-up in its share price is overdue now. 

I reckon that as the latest trading update is absorbed better over time, it could give a fillip to the stock. Also, the risk of another lockdown could make Ocado a good stock to buy. In any case, I think its long-term story is intact, because it caters to the growing online sales industry. Now, of all times, it is a buy for me.

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.

Manika Premsingh owns shares of Ocado Group. The Motley Fool UK has recommended Ocado Group. 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

Passive income text with pin graph chart on business table
Investing Articles

Yields of up to 7%! I’d consider boosting my income with these FTSE dividend stocks

The London market has some decent-looking dividend stocks right now, and I’m tempted by these two for growing income streams.

Read more »

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 »