The Ocado (LSE:OCDO) share price has been very volatile of late. On 14 November, the shares closed at 926p but are now trading at around 658p. This is a big fall, but it’s only half the story. During the first 10 trading days of November, the stock nearly doubled in value.
Looking back over a longer period, the share price has crashed by almost 60% since the start of 2022.
What’s causing these fluctuations?
Expansion into Asia
On 1 November, the company announced that it had signed a deal with Lotte Shopping.
Under the agreement, Ocado will develop a network of distribution centres to support the South Korean company’s online offering. The news went down well with investors and the shares closed the day nearly 40% higher.
No financial details of the deal were disclosed. Why the share price reacted so positively remains a mystery to me. It continued to climb for several days afterwards, almost doubling the market cap of the company.
Shareholders were disappointed on 15 November when The Times published an article under the headline “Ocado has yet to prove it is a good fit“.
The author noted that its enterprise value (a measure of a company’s worth) was 82 times forecast earnings. The article suggested that investors needed “blind faith” to continue backing the company. It also warned that the shares were “nowhere near” being a bargain.
Investors took fright and the share price has fallen dramatically over the past week or so.
The case against…
It’s fair to say that the company has many critics, myself included. In its 22 years of trading, it has only made a full-year profit three times.
The company has never paid a dividend and its net debt is increasing. Revenue in 2022 is expected to be lower than in 2021.
Despite this, the business has a higher stock market valuation than J Sainsbury.
…And the case for
Supporters will argue that the company is seeking to exploit the long-term trend towards online shopping.
According to Global Data, only 6% of grocery shopping is currently done via the internet. This will inevitably increase over time. Ocado is well positioned to exploit this.
The company has invested heavily in robotics, logistics and software. It has successfully filed over 500 patents and will seek to benefit from first-mover advantage.
However, I remain to be convinced and will not be investing.
Yes, annual group revenue has increased during each of the past five years. But the loss before tax is at its highest level since 2017.
Until Ocado can demonstrate a track record of sustained profitability, I believe its share price will continue to be volatile. I’m looking for stability, especially during the current economic downturn, so no thanks!
James Beard has no position in any of the shares mentioned. The Motley Fool UK has recommended Ocado Group and Sainsbury (J). 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 2022