Why I’m bullish on the Ocado share price

The Ocado share price fell yesterday as revenues fell in the last quarter. Charles Archer thinks now might be the time for him to buy the dip.

| 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.

Supermarket aisle with empty green trolley

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 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. 

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.

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.

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.

More on Investing Articles

US Stock

The Nvidia share price falls! Here’s what I think happens next for the S&P 500

Jon Smith reviews the overnight results from Nvidia and explains why this could stall the S&P 500 performance through to…

Read more »

Investing Articles

Down 15% today, is this FTSE 100 share too cheap for me to miss?

JD Sports' share price has tanked after the FTSE 100 share released another profit warning. Is this the opportunity I've…

Read more »

Investing Articles

Up 8% today, is this FTSE 100 growth stock a slam-dunk buy for me?

Halma's share price is soaring thanks to another headline-grabbing trading update. Is the FTSE 100 stock now too good for…

Read more »

Investing Articles

With a P/E ratio of just 10.5 is now a brilliant time to buy a cut-price FTSE 250 tracker?

Harvey Jones says a recent dip in the FTSE 250 leaves the index trading at bargain levels. One stock in…

Read more »

Warren Buffett at a Berkshire Hathaway AGM
Investing Articles

To build a passive income flow, I’d follow this Warren Buffett approach

Warren Buffett has set up passive income streams most people can only dream about. Our writer sees some practical lessons…

Read more »

Growth Shares

As the boohoo share price falls, could it become a penny stock in 2025?

Jon Smith outlines some of the recent problems involving the boohoo share price and considers if things could get even…

Read more »

Young Asian woman with head in hands at her desk
Investing Articles

Here are the worst-performing FTSE 100 shares over the last 5 years

These five FTSE 100 shares have been complete duds over the last half decade. But is there potential for a…

Read more »

Investing Articles

Nvidia stock has tripled this year! Can it keep rising?

Nvidia's latest sales update showed strong growth and the stock's been on a tear so far in 2024. So is…

Read more »