After falling almost 90% since 2021, Ocado (LSE:OCDO) shares have tumbled out of the FTSE 100 and into the FTSE 250.
The online grocery tech enterprise has been getting punished hard by investors in recent years. Rising costs of developing and deploying its automated warehouse platform has caused many investors to lose faith in an eventual path to profitability.
It’s gotten to the stage that even City analysts have begun pushing for management to change course. And with a shrinking level of support from institutional investors, the stock’s seemingly collapsed.
Yet despite this pessimism, the latest results did reveal some encouraging trends that have sparked a bit of long-overdue optimism. So is this business actually a bargain?
Guidance is up
Ocado’s venture into robotics has been quite expensive, to say the least. However, while the company continues to burn through significant volumes of cash, the outlook’s improving.
Capital outflow for 2024’s expected to improve by £150m versus the initially anticipated £100m. Meanwhile, new cost-saving optimisations have been identified that will further bolster margins steadily over the coming years. Technology spending’s expected to fall from £290m to £240m by 2026, with support costs dipping to £150m from £180m over the same period.
Meanwhile, on the grocery side of the business, Ocado’s seemingly leading the industry. On the back of higher order volumes, sales are up by double-digits across the first six months of 2024. The firm’s even expanded its market share, holding 12.3% of the UK online grocery sector.
On the back of these encouraging developments, management raised its guidance for the rest of 2024. More growth’s expected across the board, with adjusted EBITDA margins improving ahead of schedule.
Not out of the woods yet
Seeing growth and profitability improve is obviously a welcome sight for shareholders. However, Ocado still has a long road ahead. And even with these improved figures, analysts at investment broker Bernstein predicted the firm will still need to raise anywhere between £500m and £1bn to deliver on its strategy.
Considering Ocado has since gone on to raise just over £650m in a tender bond offer, Bernstein’s prediction appears to have been spot on.
The group’s now even more in debt. And around 60% of the raised proceeds came from convertible bonds maturing in 2025. That means some significant equity dilution’s on the horizon, potentially sending the share price further south if management doesn’t start generating shareholder value with this capital.
Time to buy?
As a long-term recovery play, an investment into Ocado could prove highly lucrative. But there’s no denying the exceptional level of risk attached to this stock. The group’s valuation certainly looks cheap, but whether there’s a sufficient margin of safety to warrant such a risky investment, I’m not so sure.
So until management shows more progress in delivering higher underlying margins, this FTSE 250 stock will stay on my watchlist.
