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What I think the second lockdown will mean for Ocado shares

Karl Loomes
·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.

So a second lockdown is upon us. It has seemed inevitable for some time now, but will still be a big hit for the economy. While many businesses will struggle because of it, others could be seeing the benefit for years to come. I think online grocery shopping is one type of business that will again thrive in lockdown, and I suspect Ocado (LSE: OCDO) shares may be set to benefit.

Ocado shares already doing well

Before considering the future for Ocado shares, let’s look at this year. The first lockdown and subsequent social distancing measures were a great help for supermarkets in general. Those with a strong online shopping and delivery presence benefited most of all.

The truth is that the trend towards online shopping has been going on for years. Ocado has in many ways been at the forefront of this. Most analysts and Ocado spokespeople suggest that the lockdown earlier this year acted as a catalyst towards greater online shopping. I agree.

Many people who would never have done online shopping before did so for the first time in lockdown. It is natural that once seeing the convenience and ease there would be a permanent shift in the market.

Even before this second lockdown, concerns surrounding Covid have many shoppers preferring to buy their groceries online. As this second lockdown comes upon us, I think we could see more of the same.

Will a second lockdown make a permanent shift?

Ocado’s latest expectations suggest a positive furture. Yesterday the company raised its full-year profit expectations to £60m (EBITDA). It had already raised the number to £40m two months ago.

CEO Tim Steiner said that since the announcement of a second lockdown, the company was continuing to trade at “peak volumes every day”. On top of this, average order size is edging up once again.

Of course none of this necessarily means a permanently sunny outlook for Ocado shares. Personally I do think that is a possibility, however. Ocado has an efficient (and cheap to run) automated picking and packing system already in place. It is even able to automatically calculate routes for the drivers.

The system is so good in fact, that Ocado makes much of its money selling it to other businesses. This is one advantage it has over high street stores, many of which were forced to have staff manually fulfil online orders during the last lockdown.

Ocado also has a strong history of poaching online shoppers from other supermarkets. People may initially go with the supermarket they know from the high street, but once they get used to shopping online, many move to Ocado.

The major concern I have from an investment point of view is that the Ocado share price may be too high to make it worth buying right now. Yesterday’s news brought about an 8% jump in the price, and as it stands Ocado shares are up over 90% this year.

I think we may be at the start of a fundamental shift in grocery shopping, but personally I plan on waiting for a bit of a dip before putting some money behind Ocado shares.

The post What I think the second lockdown will mean for Ocado shares appeared first on The Motley Fool UK.

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Karl has no position in any of the shares mentioned The Motley Fool UK has no position in any of the shares mentioned. 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