The FTSE 100 e-grocer Ocado (LSE: OCDO) had a fantastic run in 2020. It saw strong sales growth and the Ocado share price had rallied 164% by September last year from the stock market crash.
In the approximately six months since, however, its share price has fluctuated. It is now down by 30%, as the vaccine discoveries’ led bull run late last year made Covid-19 struck stocks more popular.
But there are three reasons that I think the Ocado share price will still turn out to be a winner over time:
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#1. A long-term investment
The convenience of online shopping, whether for groceries, personal, or household goods, is unmatched. If we were unconvinced earlier, I reckon the one year of lockdowns has shown us otherwise. In other words, the pace of e-commerce adoption just accelerated.
The company’s 40% sales growth for the thirteen weeks to 28 February 2021 certainly seems to suggest so.
#2. Sustained sales growth
And I do not think that this performance is a one-off either. The company’s revenues were growing even pre-pandemic, though in 2020 the growth accelerated as online deliveries became more popular.
Even after the pandemic, Ocado expects growth to continue, even if it is at a slower pace than last year. Importantly, the pandemic has been instrumental in gaining a customer base that would otherwise have taken longer to convince. It expects these customers to stay converts to grocery deliveries.
It is loss-making, to be sure, but I am not worried as long as it is growing fast. In 2019 it had a share of around 15% in the UK’s online groceries, which is half that of market-leader Tesco’s share, suggesting that has the potential to make gains. Further, it is targeting international markets as well.
#3. Ocado share price is just right
As a loss-making stock, my preferred yardstick to compare shares, the price-to-earnings (P/E) ratio is not applicable here. Instead, I considered the price-to-sales (P/S) ratio, which is at 6.4 times.
This is actually lower than that for Flutter Entertainment at 6.7 times, another FTSE 100 stock that made big gains during 2020. It is, however, higher than the 4.9 times for AstraZeneca, which touched all-time highs last year.
In other words, the Ocado share price is neither the most expensive nor the cheapest among comparable stocks. In fact, considering that it has fallen a fair bit in recent months, I am even more convinced it is a buy.
What to watch out for
My one doubt about the future of the Ocado share price is with regards to its relatively recent partnership with Marks and Spencer (M&S). M&S has seen stagnant to declining business in recent times. Unless Ocado plans to expand to more grocers or grow its technology platform, I think this can slow it down going forward.
What I would do about Ocado now
As it happens, Ocado does indeed plan to expand its technology solutions segment. Moreover, just like it switched over from being a delivery provider for Waitrose to M&S, perhaps it could switch again if the partnership is unviable.
So far though, things look good for it. It is still a buy for me.
