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Are Ocado shares the perfect buy in the new UK lockdown?

Stuart Blair
·3-min read
Young woman with face mask using mobile phone and buying groceries in the supermarket during virus pandemic.
Young woman with face mask using mobile phone and buying groceries in the supermarket during virus pandemic.

Ocado (LSE: OCDO) was one of the top performers in the FTSE 100 in 2020. Indeed, while the FTSE 100 fell 11% in 2020, the Ocado share price rose a staggering 87%. This rise was spurred on by increased demand and rising revenues. But it has left shares expensive and there are worries about the company’s long-term direction. As such, with the UK in lockdown number three, is it now a good time to invest in the online supermarket, or are there cheaper and better options out there?

Impacts of the new UK lockdown

Whereas a new lockdown is usually negative news for the FTSE 100, it often provides a boost for Ocado. This is because more customers try to avoid supermarkets, and Ocado is a logical alternative. Indeed, the Ocado share price has risen over the past week and is close to its all-time high achieved in September.

But while good in the short-term, questions still abound over whether online grocery shopping is the future. Tim Steiner, the chief executive of the company, certainly thinks so. He stated last year that “the world as we know it has changed”, and it will not change back after the pandemic. This optimistic viewpoint signals that the Ocado share price may continue to rise, even once the pandemic is over.

But I’m not as convinced. I do think that Ocado has a very strong business, and of course, it is well suited to the current climate. However, these are exceptional times, and I cannot see revenues continuing to rise after the pandemic.

Ocado has also struggled to make a profit these past few years, mainly due to increased investment in other areas. While it is good to see a company expanding, I would still like to see it making a profit, especially at a time when demand is soaring. This can be contrasted with the traditional retailers like Tesco, Sainsbury, and Morrison’s, each of which has seen strong profits.

Are there other reasons I’m not buying Ocado shares?

The overvaluation of shares isn’t the only reason why I’m leaving Ocado shares on the shelf. For example, the introduction of Amazon Fresh into the UK is sure to add competition and take market share away from Ocado.

There are also problems with the company’s technology sector. Indeed, in October last year, Norwegian robotics company AutoStore filed a lawsuit against Ocado claiming patent infringement. Although Ocado have dismissed these claims, it is still not ideal for the company. I believe it may also place a strain on the Ocado share price over the next few months.

Finally, the company is not immune from the impacts of Brexit. Customers have recently been warned that there may be food shortages, and inconvenience is expected to follow. This is one reason why I believe many customers will revert back to traditional supermarket shopping after the pandemic. As such, while the Ocado share price may rise in the short term, I’m less convinced about its long-term future.

The post Are Ocado shares the perfect buy in the new UK lockdown? appeared first on The Motley Fool UK.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Stuart Blair has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Amazon. The Motley Fool UK has recommended Tesco and recommends the following options: long January 2022 $1920 calls on Amazon and short January 2022 $1940 calls on Amazon. 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 2021