Ocado (LSE: OCDO) shares are currently changing hands at more than 70% below where they were a year ago. Even so, I won’t be putting them on my shopping list any time soon.
Here are five reasons why I’m not investing in “the world’s largest dedicated online grocery retailer“.
1. No profit
Call me old-fashioned, but I like a company that makes a profit. In its 22 years of trading, Ocado has only made a full-year profit three times.
The company’s sales may have grown more than 70% over the past four years, but its loss before tax has deteriorated by £168m. And analysts don’t expect Ocado to be profitable any time soon.
2. No dividend
The company has never paid a dividend.
This is partly because it hasn’t been consistently profitable, but also due to a policy of reinvesting surplus funds into growing the business.
Retaining cash for investment is laudable but, to help me counter inflation, I like to own stocks that pay a decent dividend.
3. No cash
On 29 May, Ocado reported a net debt position of £759m. This had worsened by £947m compared to a year earlier.
In June, the company raised a further £875m — £575m through a rights issue and £300m via a revolving credit facility.
The board says it has no need to raise further funds, but if the losses continue for longer than expected, this will change.
Ocado is also a very capital-intensive business. It spent £559m on property, plant and equipment in 2021.
4. No growth
In its September trading update, the board disclosed that it expects growth in customer numbers and orders during the last quarter. But full-year revenue in 2022 will be lower than in 2021.
This is because customers are putting fewer items into their online shopping baskets.
During the third quarter, the average basket, at £116, was worth 6% less when compared to the same period in 2021. More worryingly, the number of items in the average basket was down 10%.
5. No logic to its valuation
Even with the significant decline in its share price, Ocado still has a market cap of £4.1bn. To put this in perspective, J Sainsbury made a profit before tax of £854m in 2022, but it’s valued at £4.3bn.
Marks and Spencer, which has a joint venture with Ocado, is profitable and has a stock market valuation of £2bn.
One of the lessons I learned from the dotcom crash is that just because a business generates all of its income online, it doesn’t necessarily make it a sensible investment.
No thanks
For these reasons, I won’t be investing in Ocado. Of course, I might regret this.
The board claims to have a “clear path” to generating revenue in excess of £6.3bn and EBITDA (earnings before interest, tax, depreciation, and amortisation) of £750m+ within four to six years.
At the moment, I remain to be convinced.
