Since market close on 12 September, the Ocado (LSE: OCDO) share price has fallen 19%. And over the past 12 months, it’s crashed by 67%.
Ocado shares are a long way from their all-time high of over 2,900p during the pandemic. So are we looking at a screaming buy now?
We had an Ocado Retail profit warning on Tuesday. Ocado says it now expects “a small sales decline in FY22 and close to break-even EBITDA“.
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Customers are feeling the cost-of-living squeeze and buying less. Shopper numbers are up 23%, but the average order dropped 6%.
M&S down too
Ocado Retail is run jointly by Ocado Group and Marks & Spencer. M&S shares also declined, losing 7% since the update. M&S has fallen 36% in the past 12 months.
I think the latest disappointment hides a bigger underlying problem.
Ocado was a bit of a growth share darling, even in the years leading up to the pandemic. And then when Covid arrived, it almost went into orbit. The online shopping revolution had just received a massive boost, and Ocado was one of its pioneers.
That alone though wouldn’t justify the soaring growth share price for me. After all, it’s still just grocery shopping, and the total amount people eat isn’t going to rapidly expand. You still need warehouses to store all the stuff, and margins aren’t much different.
Technology
No, the growth spurt was all about technology. Ocado isn’t just a supermarket. It also has the technology needed to manage online shopping — logistics, software, the lot. Supermarkets around the world wanting to expand online can get the whole startup package direct from Ocado.
In my mind, this just created confusion. Am I looking at an online supermarket that’s being priced as a high-tech growth share? Or is it a high-tech growth share that isn’t even earning the profits of a supermarket?
That’s the core issue, profit. Or rather, no profit. Even during the advantageous pandemic lockdowns, Ocado was still unprofitable. And it’s been raising more new cash this year.
That means I have absolutely no idea of how to put a fair valuation on Ocado shares. And even if I did, who knows what further dilution shareholders might face before they can pocket their first profits?
Customer expansion
What will happen next? There’s surely still some pretty big potential for online groceries expansion around the world. And at the halfway stage this year, it looked to be going well.
Ocado had 16 customer fulfilment centres live with partners around the world. And it spoke of 11 new partners in nine countries having newly signed up. It’s been making what sounds like promising progress in improving its offerings too.
On the financial front, the company doesn’t expect to need any further financing in the mid-term, “as the business becomes cash flow positive“.
Right now might turn out to be a good time to buy cheap Ocado shares, ready for steady growth once conditions normalise. So will I buy? Nope. Not until I see that cash flow and can work out a fair valuation.
