Plenty of FTSE 100 stocks are red hot right now. Having surpassed 8,400 points, the index is regularly reaching new all-time highs in 2024.
However, Ocado (LSE:OCDO) is one FTSE 100 company that isn’t joining the party. The online grocery business has lost over half its value since January and, unfortunately, I think the downtrend might continue.
Here’s why I’m steering clear of Ocado shares.
Share price fall
The Ocado share price has been on a remarkable journey. During the pandemic, it soared to record highs, propelled by an online shopping boom. At one point, shares were changing hands above £28 — a far cry from today’s price a little above £3.50.
Investor confidence has since evaporated amid Ocado’s profitability struggles and inability to capture sufficient market share. In addition, the balance sheet doesn’t inspire confidence. Net debt has almost doubled to a whopping £1.07bn.
Beyond weak financials, I fear there are even more pressing risks facing the company.
M&S dispute
One major reason Ocado shares could remain depressed is the prospect of litigation with fellow FTSE 100 retailer Marks and Spencer.
Five years ago, the firms signed a deal to own 50:50 stakes in Ocado Retail, an online food joint venture. Under the contract, M&S initially paid £562m and is due to pay a further £190m, based on certain targets being met.
M&S plans to withhold the final sum because Ocado’s failed to meet those targets, prompting Ocado to threaten legal action.
The souring of relations is particularly unfortunate considering the venture is starting to show signs of improvement. Ocado Retail’s sales increased 7% to £2.4bn in FY23.
While Ocado might be able to sell its retail arm to M&S this isn’t guaranteed and the possibility of a protracted dispute is an unwelcome headache.
Possible FTSE 100 relegation
Another potential headwind is Ocado’s possible demotion from the FTSE 100 to the FTSE 250.
The Ocado share price slump means the company now has the second-smallest market cap in the Footsie, having dipped below £3bn.
If the business loses its position in London’s premier index, this could adversely impact Ocado’s long-term share price trajectory.
There are reports that the firm might switch to a US listing to boost its valuation, but I’m sceptical this will be a silver bullet for its fundamental performance woes — if it happens at all.
Plenty to prove
Overall, I feel Ocado’s hopes rest on being valued as a fully-fledged tech stock. This is what the company believes its USP is.
It describes itself as “a technology business redefining ecommerce, fulfilment and logistics in online grocery and beyond“.
Ocado’s technology solutions have clear growth potential. After all, its end-to-end online grocery platform is a unique proposition in the market.
The company’s proprietary technology is protected by over 2,600 patents filed or granted, which helps to secure a competitive advantage. Plus, further investment in AI could lead to efficiency improvements across Ocado’s robotic workforce.
However, although its technology solutions division delivered a 44% revenue jump to £421m last year, it still only accounts for 11.5% of total sales. That’s not enough yet to justify a higher valuation in my opinion.
Disappointing financials, no dividend payments, and potential legal troubles make this stock an unattractive investment for me.
I’m looking for other FTSE 100 shares to buy instead.
