In the past few weeks, positive news from Ocado Group (LSE:OCDO) has sent the share price flying higher. In fact, Ocado shares are up a whopping 39% in just the past month. I’ve been staying away from the company for a long time and I didn’t envisage this short-term pop. Yet with the share price still down 64% in a year, here’s why I’m still not convinced about a positive future.
The short-term rally
The first piece of good news came in the middle of October when it was announced that US company Kroger had bought out a large competitor. Since 2018, Ocado has had a partnership with Kroger, helping with tech services for logistics and grocery distribution. Clearly, the US firm is going to be expanding significantly with the acquisition. This is likely going to mean that Ocado will benefit indirectly due to higher demand for its services via the partnership.
Following this, further news broke of a new deal agreed between Ocado and Lotte Group in South Korea. This is to provide customer fulfilment centres (CFCs) for the large group that has a supermarket arm. The aim is to have six open by 2028. Not only is this a major breakthrough into Asia, but also a bid breakthrough for the solutions arm of Ocado.
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Both pieces of news have provided a shot in the arm for the stock. The business has desperately needed some kind of positive catalyst following lacklustre half-year results. The negative slant from the UK retail division due to rising cost inflation has been a headache for a lot of investors in 2022 so far. I think the UK could easily see high inflation translate into stagflation next year. This could compound Ocado’s problems.
Why I won’t be buying Ocado shares
Despite the good news, I’m not convinced that I should invest my hard-earned money.
One reason for this is that the logistics and solutions part of the group is still small in comparison to the grocery retail division. For example, in the half-year results, the retail part generated revenue of £1.1bn. International solutions posted revenue of £58.5m. UK Solutions & Logistics was better at £395.6m, but still far from the weight of the retail business.
The concern here is that it doesn’t really matter right now what deals get announced, the financial results for at least the next couple of years still hinge on the grocery division. Given the high inflation that I think will persist well into 2023, I see revenue falling. More-price-conscious shoppers could switch to cheaper alternatives. It doesn’t paint a pretty picture.
I do understand the long-term view. In 2028, the CFCs in Korea could be starting to perform very well. Yet I’m happy to wait until then in order to buy shares in a much more stable Ocado business that isn’t so heavily dependent on the retail arm. When looking for a home for my cash for the next few years, I think there are much better alternatives.
