Imagine my surprise when I logged onto my trading account to find the Ocado (LSE: OCDO) share price had jumped 13.5% this morning. It’s not often the FTSE 250 grocery tech specialist delivers good news, but it’s done it today. So can the excitement last?
If anybody needs cheering up, it’s Ocado shareholders. The stock soared during the pandemic as investors convinced themselves it would dominate online grocery deliveries forever. Then reality kicked in. Rising interest rates hammered expensive growth stocks, supermarket partners like US giant Kroger cut back spending plans, and the company’s losses kept piling up.
Ocado operates in two parts. Its retail arm, which it owns jointly with Marks and Spencer, sells groceries online in the UK. Its technology division builds state-of-the-art automated customer fulfilment centres (CFCs). The retail business has held up reasonably well. The technology side has struggled. So what’s changed today?
Can this deal revive Ocado’s fortunes?
UK grocery chain Asda has signed up to use Ocado’s technology platform as part of its attempt to revive online sales. From 2027, Asda will replace its existing systems with Ocado software across stores and fulfilment centres.
Asda executive chairman Allan Leighton said: “Partnering with Ocado will strengthen our online offer and provide a consistent and high-quality experience for millions of shoppers, from order through to delivery.” Frankly, that’s music to my ears.
The deal stretches beyond simple home deliveries. Ocado will supply webshop technology, click and collect systems, fulfilment software, and delivery optimisation tools. Asda will also fulfil orders through Uber Eats, Deliveroo, and Just Eat.
This also gives Ocado another template it can offer to supermarket chains worldwide. There’s a snag, though. This won’t do much for the current financial year, which still looks soft. Once again, investors must wait for their jam to be delivered tomorrow rather than today. Ocado also faces the constant challenge of persuading retailers to invest huge sums in its CFCs. That becomes even tougher as borrowing costs climb.
How brave do investors have to be?
Even after today’s jump, Ocado shares still sit 20% lower over 12 months and a brutal 89% lower over five years.
The retail arm continues to perform decently. It’s winning market share and grocery volumes continue to improve. Yet the wider group still loses money.
That’s the real risk here. Ocado may eventually need more cash from investors, which would dilute existing shareholders. A lot now rests on ramping up that CFC rollout.
I regularly think about selling my own holding, but haven’t done it yet. So what’s stopped me? Partly that’s the sunk cost fallacy, where investors cling to losing shares because they’ve already lost so much money on them. But Ocado has brilliant technology and I think it still retains a fighting chance.
So is this a once-in-a-lifetime recovery opportunity? Possibly. But as the market draws to a close, it’s clear that profit takers have moved in, as the shares have retreated. They’re now up just 5% on the day. Ocado is clearly volatile. But it may still be worth considering for brave investors who can stomach the ups and downs.
Should you invest £5,000 in Ocado Group Plc right now?
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Harvey Jones owns shares in Ocado Group.
