Should investors be tempted by Ocado’s share price?

Ocado’s share price is at under £5 a share — a substantial discount, considering where the stock was trading at the height of the pandemic. Before adding the stock to their shopping baskets, investors need to weigh up whether this is an exciting entry point or a symptom of a continued downward trend in what had been a pandemic-era stalwart.

Ocado’s [OCDO.L] share price is down nearly 40% in the past 12 months, and over 21% year-to-date. On Friday 6 May the stock closed 495.5p, well short of its 989.6p 52-week high. Even that level is some way off the pandemic-era highs of February 2020, when Ocado’s share price traded for over 2,900p.

The dismal share price performance comes as Ocado says it is to close its Hatfield fulfilment centre later this year, putting 2,300 jobs at risk. Ocado processes 400,000 orders at the site, which was its first; however, a newer generation of robotic fulfilment centres are more efficient and cost-effective.

Is Ocado’s share price a trap?

Building state-of-the-art robotic customer fulfilment centres for international clients is one side of Ocado’s business. However, the level of investment needed for these centres is a massive drain on the bottom line. This side of the business made a pre-tax loss of £113m in 2022, and a £119m loss in 2021.

Profits from Ocado’s retail side would normally counterbalance the shortfall. However, last year the retail side of the business made a £4m loss, down from a £150m profit the year before. Hurting retail sales has been the cost of living crisis, which has squeezed household budgets. Overall, the group saw an eye-watering before tax loss of £501m in 2022.

Shareholders have made their discontent clear, with 30% of them voting against CEO Tim Steiner’s £2m pay packet at Ocado’s AGM this month.

Another drag is the rising cost of food. Food prices soared 15.7% in April, according to the BRC-Nielsen Shop Price Index, up from a 15% increase in March. The more groceries cost, the more Ocado could lose business to cheaper rivals or see smaller orders coming in online.

Then there’s food delivery apps. For example, groceries now represent 11% of Deliveroo’s [ROO.L] business. CEO Will Shu told industry magazine The Grocer recently that the company now handles more orders than Ocado Retail.

Covid-19 turbo-charged the online delivery market and Ocado benefitted in increased sales and investors betting that the stock would keep rising. Yet Ocado’s share price is now trading below pre-pandemic levels — it had ended 2019 at 1,279p a share. Considering the current headwinds and business performance, even if the stock does recover, Ocado’s share price could be something of a bet.

Is Ocado’s share price a buy?

Still, there are causes for optimism when it comes to Ocado’s share price and, arguably, it could be a bargain right now for those who can stomach a potentially volatile long-term investment.

Despite a slowdown in retail revenue last year, first quarter trading for Ocado’s retail business with Marks and Spencer [MKS.L] has picked up. Revenue was up 3.4% year-on-year to £584m in the first quarter. The number of customers was also up almost 14% in the first quarter, while the average orders per week gained 3.6%, reaching 381,000. According to Ocado Retail’s CEO Hannah Gibson, business should “build momentum through the second half of the year” and return to profitability.

Despite the drain on profits, revenue for its international solutions business more than doubled to £148m from £67m.

Analysts at Deutsche Bank [DB] are cautiously optimistic on Ocado shares. In April they initiated coverage on Ocado with a ‘hold’ rating, saying that the shares represented a balanced risk/reward profile.

Deutsche noted that Ocado had morphed into the prime technology provider for several large grocery chains, and had a pipeline of contracts to build fulfilment centres. However, the analysts noted that the macroeconomic outlook would drag on the retail sector a while longer, and profitability might not come until the end of next year.

“With its best-in-class technology, the company is rising penetration rates of online grocery shopping and benefits from the need of large supermarket chains to automate customer fulfilment centres in order to improve efficiency and not miss out on customer acquisition in the online space,” the analysts wrote in a note to investors. “We expect further wins in the near future given its market-leading technology and model profitability break-even here by FY24.”

The Deutsche analysts have a 550p price target on Ocado shares, suggesting a 11% upside on Friday’s close.

Ocado’s share price has a 12-month median target of 670p from analysts tracking the stock. Hitting this would see a 35.2% upside on Friday’s close.