Is the Ocado share price set for a comeback?

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Ocado (LSE: OCDO) shares are showing signs of recovery. In July, share prices fell 39% from January’s all-time high of 2,883p. But a recent surge means Ocado’s shares are up 11.2% in the last month and 10.1% in the last five days, currently trading at 2,057p. Could the online supermarket carry this momentum forward and rebound back to the 2,500p levels? 

Financials

Normalising buying trends after the lift in lockdown restrictions and the release of H1 2021 financials on 6 July triggered a fall in share prices. Shareholders responded to the reported losses which caused the 10% slide immediately after financials were released.

Pre-tax losses in H1 2021 did narrow from £40.6m (H1 2020) to £23.6m (H1 2021). This can be attributed to the 37% increase in revenue generated during the first quarter of 2021, driven by a large increase in the active customer base during the pandemic. But, revenue figures have slowed down considerably in the second quarter with only a 7% reported increase. Both quarters combined, overall growth in revenue for H1 2021 stands at 20%.

I predict a further drop in sales revenue in H2 of 2021 as buying patterns normalise. Consumers can now eat at restaurants and shop in-store and I believe this will affect Ocado’s sales. Although orders per week grew 20% to 356,000 in H1 of 2021, a significant 23% drop in basket size is reflective of post-pandemic life.

Optimising for the future

Ocado’s board are highly optimistic about retaining the consumer base generated during the pandemic. The company is investing heavily in technology to optimize its robot-powered warehouses. The $287m purchase of Haddington Dynamics and Kindred Systems shows a vision for the future of e-commerce with Tim Steiner, CEO of Ocado, stating that “the robotic pick opportunity in online grocery is of huge value to us and our clients globally”.

I think the investment in smart warehouses will benefit the business in the future. But, as a result of the expansion, the company is expecting a further £30m drop in overall revenue in 2021. This could cause another fall in share prices after H2 financials are released. Ocado’s sole reliance on increased grocery retail to cover for losses is concerning to me as a potential investor.

Would I buy Ocado shares? 

The share price increase over the past week shows how highly sought-after the tech-driven grocer still is. But can the company sustain shareholder confidence if poor revenue figures continue?

Fellow fool Jonathan Smith argues that the £19.3bn valuation is inflated at the current share price. I believe that unfavourable financials in H2 2021 could force shareholders to consider this inflated valuation, triggering a sell-off.

My investing strategy involves targeting companies with robust financials and a steady history of profits. In my opinion, Ocado offers neither. Also, it faces stiff competition from Sainsbury’s and Tesco. These companies have a larger market share and remained profitable through the pandemic. I think Ocado’s competitors are a better investment in the supermarket space at the moment. 

Although I can see potential in Ocado’s future-focussed, tech-driven warehousing model, I would not add its shares to my portfolio today.

The post Is the Ocado share price set for a comeback? appeared first on The Motley Fool UK.

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Suraj Radhakrishnan has no position in any of the shares mentioned. The Motley Fool UK has recommended Ocado Group and 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.