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Why I’m bullish on the Ocado share price

Supermarket aisle with empty green trolley
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The Ocado (LSE: OCDO) share price hit a high of 2,895p in September 2020, before falling to 1,731p this July. After climbing to 2,013p by the end of August, it’s slipped back to 1,852p today. So what’s going on?

I’ve recently written about the Tesco share price movement. But despite also selling groceries, Ocado is a different kettle of fish. It doesn’t have physical stores, and it uses advanced robotics to pick and pack online orders from specialised warehouses. 

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The pandemic bull run

The self-isolation requirements of the pandemic saw online grocery orders rocketing. People who had never used Ocado before turned to the grocer when their usual shop ran out of delivery slots, leading sales to rise 54% during the first lockdown.

And the market dip in March 2020 caused investors to rush to the stock as a strong defensive play. These dual effects combined to send the Ocado share price soaring. As the pandemic subsides, it’s unsurprising that investors are pulling out of Ocado, looking for more lucrative short-term opportunities. But I subscribe to the Foolish investing style of holding stocks for the long term. And I believe that Ocado’s fundamentals are very promising.

Ambiguous results

The Ocado share price fell yesterday after a weak quarterly update. It suffered a major fire at its Erith warehouse in July, caused by a collision of three of its robots. Some 300,000 orders were lost, resulting in a £20m loss from business disruption and destroyed stock.

Insurance is covering half this amount, so an unanticipated £10m debt will hit profitability over the next year. And while it says lessons were learnt, it’s the second fire in only three years. Revenue slumped 19% in the seven weeks after the fire, with overall revenue down 10.6% from £552m to £517m. 

However, it was only down 1.8% in the first six weeks of the quarter, which suggests the company has retained customers it attracted during the pandemic. And the recent tie-up with Marks & Spencer is also a good sign, with 29% of products ordered now being M&S items. This partnership is likely to increase in value, as M&S has upgraded its profit guidance for the year.

A bumper Christmas for the Ocado share price?

Customer numbers rose by 64,000 to 805,000, while average orders per week increased by 1.4% to 338,000. And it expects “strong revenue growth in FY22”. While average order value fell from £141 to £124 over the last year, it’s unsurprising as consumers can now visit hospitality venues again.

Ocado expects its Erith warehouse to be fully operational by November, with CEO Tim Steiner confident of a “bumper Christmas”. He’s unconcerned about food shortages, believing there’ll be “small interruptions but nothing substantial.” And Ocado’s wider product range means it can more easily make substitutions.

But the retailer has had to set aside £5m for vehicles, wages and bonuses in order to combat the ongoing lorry driver shortage. And this could affect Ocado more than its rivals, as it doesn’t have any physical stores. 

This is a growth stock, so the potential rewards come with a risk alongside. Its warehouse technology is unique in the sector, but new technology always comes with technical issues. I think the Ocado share price is at a level to make it a good buy for my portfolio, but I wouldn’t be surprised to see wild swings along the way.

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Charles Archer has no position in any of the shares mentioned. The Motley Fool UK has recommended Morrisons, Ocado Group, and 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.

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