Is there still more upside potential for Ocado shares?

With the Ocado share price up 60% this year, is there room for even more gains?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Ocado (LSE: OCDO) shares are doing well. As I write this, they stand about 60% higher than where they started 2020. While Covid-19 and lockdown have been hurting many businesses, online grocery shopping has been the great beneficiary. In this sector, Ocado seems to be the reigning king.

Fundamental shift?

The key question we need to ask about the upside potential for Ocado shares, is how long will this last? Lockdown obviously brought many more shoppers online, but Ocado needs them to stay. Otherwise, the boost to its numbers will be short lived.

Personally I find it hard to imagine that many customers who have started using Ocado will not continue to do so. The move towards online shopping is a trend we have been seeing for years. As Ocado CEO Tim Steiner puts it, “As a result of Covid‐19 we have seen years of growth in the online grocery market condensed into a matter of months and we won’t be going back”.

I am not so sure it is quite this clear cut, but I think there is a lot of potential for this to be true. Interestingly Ocado also looks set to benefit from the broader move to online shopping in other supermarkets.

According to Steiner, Ocado has always found it easier to poach online customers from other supermarkets. This means there is potential for Ocado to benefit from a migration of sorts. New online shoppers at Tesco and Sainsbury’s may just move to Ocado.

Ocado also has another massive advantage of these high street supermarkets. Though it had some capacity teething trouble when lockdown first began, Ocado has automated, cost-efficient processes in place for picking and delivery. Its supermarket rivals meanwhile, were forced to higher people to actually go around their stores picking up grocery orders. This massively reduces the profit margins.

Are Ocado shares too high?

Despite these positives, however, I still worry that the Ocado share price is too high. At the very least, it is not offering much capacity for upside. While its latest numbers certainly show improvement (its pre-tax loss dropped to just £40.6m), it is still not making a profit.

In large part this is due to investing in its automated customer fulfilment centres as a product in their own right. There is a lot of potential in this area for Ocado going forward, so this investment may be a good move.

But if Ocado can see all these benefits from lockdown and still not break even, it raises questions for investors. Ocado shares are certainly going to be ones I keep an eye on. I suspect, however, there will be better opportunities in the future. Perhaps when the share prices losses some of its gilded edge.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Karl has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

Could I use a stock market crash to turn £20k into half a mil in just over a decade?

A stock market crash might sound terrifying to some but it can also present a once-in-a-lifetime opportunity to accumulate generational…

Read more »

Investing Articles

Recently released: October’s small-cap stock recommendation [PREMIUM PICKS]

We believe the UK small-cap market offers a myriad of opportunities across a wide range of different businesses and industries.

Read more »

Investing Articles

Here’s how a Stocks and Shares ISA and Lifetime ISA could supercharge my wealth!

Individual Savings Accounts (ISAs) can help UK share investors take their earnings to the next level. And their importance is…

Read more »

A person holding onto a fan of twenty pound notes
Investing Articles

A high-yield dividend ETF and an investment trust to consider this November!

Investors wanting to boost their passive income could benefit from investigating these high-yield funds and trusts, says Royston Wild.

Read more »

Investing Articles

2 of my favourite, cheap FTSE 100 growth shares this November!

These FTSE 100 growth shares could be great long-term picks to consider, reckons Royston Wild. At current prices he thinks…

Read more »

Investing Articles

Up 26%, can the BT share price really push higher still?

The BT share price has surged on several catalysts in 2024, but there’s evidence to suggest that the stock could…

Read more »

Man writing 'now' having crossed out 'later', 'tomorrow' and 'next week'
Investing Articles

What are the best dividend shares to buy right now?

As shares in B&M European Value Retail have fallen, the dividend yield has reached a 10-year high. Should investors be…

Read more »

Surprised Black girl holding teddy bear toy on Christmas
Investing Articles

My favourite FTSE 100 passive income stock that keeps the Christmas coffers full

The holiday season is expensive and can leave many consumers struggling to make ends meet. Here’s how I use a…

Read more »