My biggest problem with the Ocado Group (LSE: OCDO) share price is that it’s always seemed too high. But we’re now looking at a 40% fall in the past 12 months, and a whopping 75% crash since the heights of 2020.
Back at the peak, the Covid pandemic was still raging, and investment money was piling into anything related. And home shopping, well, it was a saviour when we were trapped at home and needing to keep ourselves fed and watered.
Demand for the Ocado Smart Platform technology could surely only go through the roof. Except in reality it takes a long time to get warehouses built and filled, and delivery fleets rolling.
Overheated
The pandemic just wasn’t going to hang around long enough for our entire shopping habits to turn to Ocado-driven retailers. Much of the subsequent fall, it seems, was a justified correction after the Ocado share price overheated.
The fact that, even in the 2020 lockdown year, the company still failed to make any profit hammers that home a bit harder for me.
But we’re now back to pre-pandemic share price levels. The board expects to come close to EBITDA break-even this year. And it’s surely held on to some pandemic benefits for the long term. So is it finally time to buy Ocado shares?
Record orders
Results for 2022 are due on 28 February, and we have some idea of what to expect. Revenue of £2.2bn is down 3.8% on the previous year. But there’s going to be some pandemic effect there. Compared to 2019, revenue is up an impressive 40%.
Christmas sales increased 15%, with order numbers up 13%. And in the festive period, Ocado hit a record order count in one day of more than 72,000.
Turning point?
If Ocado is hitting the profitability turning point, I think the shares could have a few good years ahead of them. But the recent past has reinforced one key lesson to me. I won’t buy into booming growth stocks in the days before they’re profitable. The majority that started with strong early share price growth in the past decade have fallen back.
But there’s a long-term lesson too. Investors who bought Ocado shares at their 180p flotation price back in 2020 have quadrupled their money. That’s even after the slump of the past couple of years.
So are things looking rosy for Ocado now? Not quite. And though I’m starting to be tempted, I wouldn’t rate it a no-brainer buy yet.
Inflation/recession
I see inflation and recession as the biggest short-term risks. The company spoke of “headwinds related to inflationary costs … and higher marketing costs“. And while order numbers are rising, basket sizes have been falling — and that damages margins, which are thin to start with.
I wouldn’t buy Ocado shares yet. I think I need to wait a bit longer and keep watching. But it makes it on to my list of possible 2023 buys.
