The Ocado (LSE: OCDO) share price jumped 15% in early trading this morning (16 July). Does this stunning reaction to the firm’s half-year numbers indicate this FTSE growth stock is finally a brilliant buy?
Turning a corner?
Let’s start with those headline figures. Group revenue rose almost 13% to £1.5bn in the 26 weeks to 2 June. A loss before tax of £154m was also ‘achieved’.
How is the latter a good thing, you might ask? Well, this was almost half the loss recorded in the same period in the previous financial year.
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On top of this, Ocado now expects its Technology Solutions division — which sells automated robots to other supermarkets — to hit “mid-teens” earnings before interest, tax, depreciation and amortisation (EBITDA) margin in the full year. It had previously guided for “more than 10%“.
All this should come as a relief to existing holders who’ve endured a rollercoaster ride as a result of the pandemic and cost-of-living crisis.
The question I’m asking is whether this is the start of a sustained recovery or a temporary respite.
Bullish talk
In support of the former, its pureplay grocery division suggests that this FTSE 250 business is brilliantly placed to take advantage of the ongoing shift to online shopping. With inflation finally cooling, this trend could be about to step up a gear or two.
There’s another, more general argument to consider.
As a general rule, growth companies need a lot of money to get to breakeven and beyond. That usually comes in the form of debt — not ideal when rates are high. With this in mind, a possible first cut by the Bank of England as soon as next month might be a boost to sentiment around stocks like Ocado, especially as it looks like it will need another cash injection sooner rather than later.
Swimming against the tide?
The problem is that many traders still believe the shares have further to fall. Indeed, the company currently sits in third position when it comes to the most shorted UK stocks.
Elsewhere, brokers are dramatically altering their price targets. Yesterday (16 July), Bernstein downgraded the stock to ‘underperform’ and moved its price from 1,000p to just 250p. That’s 27% below where it closed on the day.
In hindsight, Bernstein’s move might look a bit silly considering today’s surge. But one shouldn’t draw too much from a single day’s trading.
Moreover, I can understand why some are so pessimistic.
One particularly worrying trend is that a number of the company’s partners are pulling back or delaying opening automated warehouses built by the company. Last month, it was Canadian supermarket Sobeys. Before this, it was Kroger (US) and Coles (Australia).
This doesn’t exactly bode well, considering Ocado’s tech offering is such a huge part of its growth story.
Too risky for me
Taking a contrarian stance has the potential to make me rich. The key word there is ‘potential’. I need to have the courage to back my convictions. I also need to be right.
Considering that it’s still burning through cash and yet to make a consistent profit, I’m still not confident this stock is for me.
Instead, I’d rather back high-quality UK companies with great track records of delivering for investors, especially as some are now trading at multi-year lows.
