Ocado (LSE: OCDO) shares have taken a huge hit. Over the last month, they’ve fallen about 25%.
Now this is a stock I’ve had my eye on for a while. Is now a good time to buy it? Let’s discuss.
Why is the share price down?
Let’s start by looking at why the share price has tanked. Is there anything to be worried about?
One reason the stock has fallen is that it recently received a downgrade from analysts at Exane BNP. Stating that Ocado’s risk/reward was “out of kilter again”, the analysts lowered their rating on the company to ‘underperform’ from ‘neutral’ (and kept their target price at 390p).
Another is that the ‘higher-for-longer’ interest rate theme has resulted in a shift towards ‘quality’ stocks. I’m talking about companies with consistent profits and strong balance sheets. Ocado falls a little short here because it’s not profitable at the moment.
It’s worth pointing out that Ocado shares did have a huge run in June and July where they almost tripled. So a pullback is not really surprising.
Overall, I don’t see anything to be particularly concerned about.
Recent business performance
As for the business itself, it appears to be ticking along quite nicely.
On the Retail side, the company recently reported Q3 revenue of £569.6m – an increase of 7.2% year on year (and an acceleration in growth versus the +5% reported in H1).
Meanwhile, on the Technology Solutions side, it generated revenue of £198.2m in H1, up 59% year on year.
Looking ahead, analysts expect the company to generate revenue of £2,766m for the financial year ending 27 November (versus £2,514m last year) and £3,047m for the following year.
This growth is encouraging.
Takeover talk
Looking beyond the business performance, it’s worth noting that there has been some recent takeover speculation here.
Back in June, The Times reported possible takeover interest from several US companies, including Amazon.
This is also encouraging. However, there’s no guarantee that we will see a bid for the company any time soon, of course.
No profits
On the downside, the stock does have its flaws. As I mentioned earlier, Ocado is unprofitable right now. This financial year, analysts expect a net loss of £375m. This adds risk.
It also makes it harder to assess the company’s valuation. Given the lack of earnings, there’s no price-to-earnings ratio here.
Another risk is debt. At the end of H1, net debt stood at around £900m. This could present some challenges now that interest rates are much higher than they were.
One other issue is that the stock is attracting some attention from the short sellers. In other words, sophisticated investors expect it to fall.
My view
Overall, I do think Ocado shares look quite interesting right now.
However, I see the firm as a high-risk, high-reward play. And at present, I feel I have enough of these types of stocks in my portfolio.
So I’m not going to buy Ocado for now. But if I was looking to add some more speculative stocks to my portfolio, Ocado is one I would consider buying.
