The Ocado share price is down 30% in 6 months. 3 reasons I’d buy it now

The Ocado share price may have fallen fast in the last half year, but Manika Premsingh believes it has reason to rise from here. 

| 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.

Woman back at home after shopping groceries

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.

The FTSE 100 e-grocer Ocado (LSE: OCDO) had a fantastic run in 2020. It saw strong sales growth and the Ocado share price had rallied 164% by September last year from the stock market crash. 

In the approximately six months since, however, its share price has fluctuated. It is now down by 30%, as the vaccine discoveries’ led bull run late last year made Covid-19 struck stocks more popular.

But there are three reasons that I think the Ocado share price will still turn out to be a winner over time:

#1. A long-term investment 

The convenience of online shopping, whether for groceries, personal, or household goods, is unmatched. If we were unconvinced earlier, I reckon the one year of lockdowns has shown us otherwise. In other words, the pace of e-commerce adoption just accelerated.

The company’s 40% sales growth for the thirteen weeks to 28 February 2021 certainly seems to suggest so. 

#2. Sustained sales growth

And I do not think that this performance is a one-off either. The company’s revenues were growing even pre-pandemic, though in 2020 the growth accelerated as online deliveries became more popular.

Even after the pandemic, Ocado expects growth to continue, even if it is at a slower pace than last year. Importantly, the pandemic has been instrumental in gaining a customer base that would otherwise have taken longer to convince. It expects these customers to stay converts to grocery deliveries.

It is loss-making, to be sure, but I am not worried as long as it is growing fast. In 2019 it had a share of around 15% in the UK’s online groceries, which is half that of market-leader Tesco’s share, suggesting that has the potential to make gains. Further, it is targeting international markets as well.

#3. Ocado share price is just right

As a loss-making stock, my preferred yardstick to compare shares, the price-to-earnings (P/E) ratio is not applicable here. Instead, I considered the price-to-sales (P/S) ratio, which is at 6.4 times. 

This is actually lower than that for Flutter Entertainment at 6.7 times, another FTSE 100 stock that made big gains during 2020. It is, however, higher than the 4.9 times for AstraZeneca, which touched all-time highs last year. 

In other words, the Ocado share price is neither the most expensive nor the cheapest among comparable stocks. In fact, considering that it has fallen a fair bit in recent months, I am even more convinced it is a buy. 

What to watch out for

My one doubt about the future of the Ocado share price is with regards to its relatively recent partnership with Marks and Spencer (M&S). M&S has seen stagnant to declining business in recent times. Unless Ocado plans to expand to more grocers or  grow its technology platform, I think this can slow it down going forward. 

What I would do about Ocado now

As it happens, Ocado does indeed plan to expand its technology solutions segment. Moreover, just like it switched over from being a delivery provider for Waitrose to M&S, perhaps it could switch again if the partnership is unviable. 

So far though, things look good for it. It is still 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 AstraZeneca and Ocado Group. The Motley Fool UK owns shares of Flutter Entertainment. 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

Investing Articles

How I’d use an empty Stocks and Shares ISA to aim for a £1,000 monthly passive income

Here's how using a Stocks and Shares ISA really could help those of us who plan to invest for an…

Read more »

Investing Articles

This FTSE stock is up 20% and set for its best day ever! Time to buy?

This Fool takes a look at the half-year results from Burberry (LON:BRBY) to see if the struggling FTSE stock might…

Read more »

Investing Articles

This latest FTSE 100 dip could be an unmissable opportunity to pick up cut-price stocks

The FTSE 100 has pulled back with the government’s policy choices creating some negative sentiment. But this gives us a…

Read more »

A young woman sitting on a couch looking at a book in a quiet library space.
Investing Articles

As the WH Smith share price falls 4% on annual results, is it still worth considering?

WH Smith took a hit after this morning’s results left shareholders unimpressed. With the share price down 4%, Mark Hartley…

Read more »

Investing Articles

The Aviva share price just jumped 4.5% but still yields 7.02%! Time to buy?

A positive set of results has put fresh life into the Aviva share price. Harvey Jones says it offers bags…

Read more »

Investing Articles

Can a €500m buyback kickstart the Vodafone share price?

The Vodafone share price has been a loser for investors in recent years, and the dividend has been cut. We…

Read more »

Frustrated young white male looking disconsolate while sat on his sofa holding a beer
Growth Shares

3 mistakes I now avoid when choosing which growth stocks to buy

Jon Smith runs through some of the lessons he's learnt the hard way over the years about what to look…

Read more »

Warren Buffett at a Berkshire Hathaway AGM
Investing Articles

Should I follow Warren Buffett and sell my favourite shares?

Billionaire US investor Warren Buffett has been selling tons of Apple shares and other stocks of businesses he thinks are…

Read more »