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Ocado shares have turned £5k into £10k in a month. Should I buy them now?

Young Black man sat in front of laptop while wearing headphones
Young Black man sat in front of laptop while wearing headphones

Ocado (LSE: OCDO) shares have more than doubled in the last month, making this the best-performing stock on the FTSE 100 lately.

Shares in the grocery tech specialist have increased an incredible 112.39% over the last month, which would have turned a £5,000 investment into an impressive £10,691. I’d be celebrating if I’d bought Ocado shares a month ago. Sadly, my crystal ball was broken that week. The big question is should I buy them today?

Time to buy?

The truth is that I haven’t considered buying Ocado for several years. I missed out on the stock’s golden age, when the shares spiked tenfold from 282p to 2,895p in the three years to September 2020.

I’ve always been wary of jumping on a stock after it has rocketed. The big risk is that I end up buying at the top of the market, just before the crash.

Ocado shares did crash, badly. By 13 October this year they’d given up most of their gains, falling to just 435.80p. So the recent share price jump should be seen in that context. Loyal investors are still well down.

Ocado used to be seen as a supermarket but is now treated as a tech stock, as it looks to sell its automated grocery warehouse technology worldwide. Investors bought it for growth tomorrow, rather than dividends today.

That worked in the era of endless fiscal and monetary stimulus, but that’s now over. Higher inflation and interest rates have hammered growth stocks, by eroding the value of their future earnings. Investors are no longer in the mood to take risks.

Ocado rebounded after announcing that it had secured a deal to provide its online grocery fulfilment solutions to South Korean retailer Lotte Shopping. In another boost, its US partner, grocery chain Kroger, agreed to buy rival Albertsons in a $24.6bn deal, expanding Ocado’s market.

This FTSE 100 stock is going global

A string of global supermarkets now use the Ocado Smart Platform, including Sobeys in Canada, Sweden’s ICA, Groupe Casino in France, Spain’s Alcampo, Japan’s AEON and Coles in Australia. In the UK, it also has tie-ups with Morrisons and Marks & Spencer.

The big problem is that Ocado isn’t making a profit yet, while having to pour large sums into tech development.

At the same time, Ocado Retail, its joint venture with M&S, is suffering as inflation rises while customers struggle. First-half revenues fell 8% to £1.1bn. And the group is a grocery minnow, making up just 1.8% of the total market.

So management is fighting to make a profit on two fronts and succeeding with neither amid challenging economic circumstances. While revenues climbed from £1.454bn in 2017 to £2.498bn last year, pre-tax losses widened from £8.3m to £176.9m over the period.

Today, Ocado shares have fallen a thumping 12.6%, after The Times warned of the impact of rising living costs, inflation and high capital expenditure. It also pointed out that the stock that has “an enterprise value of 82 times forecast earnings before tax and other charges”. So hardly a bargain then.

That pretty much sums up the conclusions I came to on my own. I won’t be buying Ocado shares today. The risks are just too great.

The post Ocado shares have turned £5k into £10k in a month. Should I buy them now? appeared first on The Motley Fool UK.

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Harvey Jones doesn't hold any of the shares mentioned in this article. The Motley Fool UK has recommended Ocado Group. 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