Ocado Group (LSE:OCDO) enjoyed a very strong 2020. It was one of the few companies that actually saw increased demand for its products and services with the lockdown. The technology and distribution arm of the business grew, as well as the more traditional online grocery service it provides. In a year, Ocado shares are up almost 100%. Unfortunately, in February it was the worst-performing FTSE 100 stock, down over 23%.
Growing but still loss-making
A couple of weeks ago, I covered Ocado shares following the release of the full-year 2020 results. It may have been rather puzzling at first glance on the day, as Ocado shares slumped despite strong percentage growth in key areas. For example, retail revenue was up 35%, with the logistics and solutions network growing 13.5% year-on-year.
However, some may forget that Ocado is still a loss making company. 2020 was no different, despite the growth. The growth meant a smaller loss of £44.1m than the 2019 figure of £214.5m, but it’s still a loss. This was the main driver as to why the share price fell after the results were released in February. If the growth trajectory maintains at the same percentage, then Ocado should break even as early as the end of this year.
Another company-specific issue that has caused Ocado shares to wobble is the rumour of a new digital sales tax. Ocado CEO Tim Steiner last month said it was “wholly inappropriate”. As the digital sales tax is still at a very early stage of consideration by the Government, full details aren’t clear. However, it looks as if online companies like Ocado would be subject to an extra tax when selling goods. Such a tax could dent earnings.
Ocado shares suffering from positive news
It may seem contradictory, but Ocado shares also suffered last week due to a more optimistic outlook on Covid-19. Last week the share price fell over 14%, coinciding with PM Johnson releasing his pathway to lockdown easing. The guidance means that restrictions are likely to be eased in coming months, with all restrictions potentially lifted by June.
Add into this mix the continued performance of the vaccination rollout here in the UK. The figure is now over 20 million, and rising quickly each day.
Putting both together, it looks like lockdown will be eased and consumers will feel more comfortable shopping again in physical stores. Even though Ocado is a diversified business, it could see a hit to revenues it gets from online grocery orders. The extent to which revenues could fall remains unknown. And of course, they may continue to grow (but much more slowly than in the past year). Ocado shares have fallen on these announcements, and analysts will be trying to forecast the potential hit to Ocado and how this translates to the bottom line.
Overall, Ocado shares were the worst-performing FTSE 100 stocks in February by some distance. Yet it’s important to remember that over the longer term, the share price has still performed very well.
