Ocado (LSE: OCDO) is a stock I’ve been keeping a close eye on for a while. That’s because it’s one of the fastest growing companies in the FTSE 100 index, with five-year annualised sales growth of 16.1%.
But recently, Ocado’s share price has pulled back. Is this a good opportunity for me to buy? Let’s take a look at the investment case.
Ocado’s share price has fallen
There are a number of things I like about Ocado. Firstly, it’s generating strong growth in its retail segment. The company’s recent full-year results showed it generated growth of 35% here for the 52 weeks to 29 November. That’s an impressive level of growth. Earnings before interest, tax, depreciation and amortisation (EBITDA) in this division also came in at £148.5m – up 266% year-on-year.
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Secondly, the group has a unique automation technology offer in its ‘Ocado Smart Platform’ (OSP). This is an end-to-end solution that helps other supermarkets move online. Supermarkets Ocado is currently working with include France’s Groupe Casino, Canada’s Sobeys, and Australia’s Coles. Ocado says seven out of its nine current partners will be using its platform by the end of this financial year.
Overall, I think the future looks bright for Ocado.
Will online grocery shopping growth continue?
That said, there are a few risks that could hit the share price. One is that, post-Covid-19, online supermarket sales could fall as shoppers return to stores. But Ocado’s CEO Tim Steiner believes online grocery shopping is here to stay. He expects online grocery in Britain to double in size again over the next few years.
However, not everyone is as bullish as Steiner. For example, Christian Härtnagel, CEO of Lidl GB, believes that online sales growth will moderate in the near term. He believes that as the crisis recedes, so will online grocery penetration.
“A lot of people are talking about the new normal, I’m absolutely convinced that we are not in this new normal right now, we are in the temporary normal, we are in an extraordinary time,” he told Reuters recently.
Another issue to be aware of is that the OSP is losing money. This is impacting group profitability significantly. Moreover, Ocado is spending a lot of money to invest in this side of the business. Recently, the company told investors that total capital expenditure for the group is expected to be around £700m this year. This large amount of investment appears to be testing investors’ patience and affecting the share price.
It’s worth pointing out, however, that Bank of America analysts believe profits from this division will kick in in 2022. That’s not too far away now.
Should I buy Ocado shares?
Overall, I’m cautiously optimistic on the outlook for Ocado shares. This is a more speculative stock, in my view, because the company is currently losing money. However, after the recent share price pullback, I’m a buyer of the stock.
