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Down 20% in a week, should I buy Ocado shares now?

Middle-aged white man wearing glasses, staring into space over the top of his laptop in a coffee shop
Image source: Getty Images

It has been a rocky road for Ocado (LSE:OCDO) both in the short term and long term. The share price performance last week (down 20%) was the worst in the FTSE 100. Over a broader one-year timeframe, Ocado shares are down 65%. I’ve been pessimistic about the stock for some time, but should this extra fall change my view?

Reasons for the fall

The release of the full-year 2022 results at the end of February hasn’t helped the stock. Group revenue was broadly flat versus a year ago, but the flip in the retail division from a profit to a loss meant that overall group posted an EBITDA loss of £74.1m. This contrasts to the profit of £61m recorded in 2021.

It flagged the main reason for the underperformance, which was “a result of cost pressures and capacity investments made to support growth at Ocado retail”. I think most investors were aware of the grocery inflation levels and how it was hurting the company. Yet the size of the cost pressures were significant!

High inflation in the UK has been another reason that has dampened the share price performance over the past year. The retail division has experienced lower interest as cost-conscious shoppers decide to find cheaper alternatives. Granted, the logistics and solutions division has done well, but the overall size of the retail arm means it still accounts for the largest share of group revenue.

Why I don’t see the stock as cheap

For some companies, I can use the price-to-earnings ratio to argue that a stock is cheap. I can’t do this for Ocado as the business is loss making. Even if I could, I’d take the ratio with a pinch of salt. This is because I feel the falling share price is accurately reflecting the value of the business. As such, it’s fairly priced in my eyes, not cheap.

The company is simply underperforming right now. Other companies such as Tesco have also struggled with high inflation, yet the Q3 and Christmas trading update showed like-for-like sales growth versus last year. It also kept market share at 27.5% in the grocery space.

I think this highlights an important point. Just because a stock has fallen, it doesn’t mean it’s a cheap value buy.

My overall thoughts

Despite my fairly harsh assessment, I could be wrong. The business is investing in client partner sites and fulfilment centres. This diversifies revenue away from the retail arm. If this continues to grow, I think the stock becomes a lot more appealing to buy. It then truly becomes more of a tech company.

A reduction in inflation over the next year could also help to boost Ocado shares as margins grow and profits returns.

Even with the short-term fall, there’s no way I’m going to buy the stock at the moment.

The post Down 20% in a week, should I buy Ocado shares now? appeared first on The Motley Fool UK.

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Jon Smith has no position in any of the shares mentioned. The Motley Fool UK has recommended Ocado Group Plc and Tesco Plc. 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.

Motley Fool UK 2023