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The Ocado share price is up 82% this year! Here’s what I’d do now

G A Chester
·3-min read
Arrowings ascending on a chalkboard
Arrowings ascending on a chalkboard

The Ocado (LSE: OCDO) share price has been absolutely flying this year. Last month, it reached a new all-time high of 2,895p — up 128% since the start of the year.

However, currently at 2,313p, it’s 20% off the high. Could this be a great dip-buy opportunity? Here’s what I’d do now.

The rise and rise of the Ocado share price

Ocado divided analysts on its flotation at 180p a share in 2010. Founded 10 years earlier, it had never made a profit. Today, analysts are as divided as ever.

According to the Financial Times, six are positive on the stock, six negative, and six neutral. Meanwhile, profit forecasts on Ocado’s corporate website show how extreme the division is between the most bullish and bearish analysts.

For the current year, the highest forecast is a pre-tax loss of £119m, and the lowest, a loss of £265m (a £146m difference). And the gap becomes even wider for 2021. Forecasts show a best-case loss of £102m and a worst-case loss of £280m (a £178m difference).

Despite years of cash burn, the perennial presence of bearish analysts, and periods of heavy short-selling by hedge funds, the market has pushed the Ocado share price up and up. Indeed, at its recent all-time high, with a capitalisation near to £22bn, the market was rating it a more valuable business than Tesco.

A technology business

Ocado’s share of the UK grocery market is just 1.8%, and it’s taken two decades to achieve it. Even its most bullish supporters acknowledge a market-cap similar to Tesco makes no sense, if it’s valued simply as a grocer. After all, its retail EBITDA last year was just £35m, compared with Tesco’s £4.7bn.

No, the bull case is that Ocado is a technology company, and is better compared with highly-rated Software as a Service (SaaS) firms. Its UK solutions arm posted EBITDA of £85m last year. That may still be underwhelming, but bulls argue a pipeline of some 200 Customer Fulfilment Centres (CFCs) in its international solutions division means the sky’s the limit for Ocado’s share price.

Bear case

Analysts in the bear camp, such as Barclays, suggest “there are numerous competitors… and it is not certain Ocado’s solution will prove the most widely adopted.” Its model has also come under negative scrutiny by analysts at HSBC and Credit Suisse.

Furthermore, bears point out that sooner or later the market will start to care about conventional valuation measures like price-to-earnings and price-to-free cash flow. Barclays argues that while Ocado’s business model has some similarities with SaaS firms, “the crucial difference is Ocado’s much greater capital intensity; ultimately Ocado builds things as much as it writes code. We think this will limit its ability to claim a SaaS-style rating.”

What I’d do about the Ocado share price

Investors have chased growth and share-price momentum at any cost in recent years. Even after the recent dip in its share price, I think Ocado will have to deliver heroically to justify it.

I share the bears’ concerns about competition and other risks, as well as their doubts about a SaaS-style rating. As such, I’m inclined to avoid the stock.

The post The Ocado share price is up 82% this year! Here’s what I’d do now appeared first on The Motley Fool UK.

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G A Chester has no position in any of the shares mentioned. The Motley Fool UK has recommended Tesco. 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 2020