The outbreak of the pandemic saw a major rise in the Ocado (LSE: OCDO) share price. However, since hitting an all-time high of 2,914p in February, it has fallen and is currently around 35% lower. Back in March, my fellow Fool Manika Premsingh explained why she was buying Ocado. So does this FTSE 100 stock’s share price still have the potential to rise as we seem to be coming out of the pandemic? Let’s take a look.

Ocado opportunities

The first positive is that the pandemic has changed consumer behaviour. At its height, many people switched to online grocery shopping. By August last year, more than three-quarters of consumers ordered at least some of their household shopping from supermarket websites. And I suspect many will continue to shop online, which provides opportunities for the Ocado share price to rise.

This view is reinforced through the firm’s latest financial results. The half-year results for 2021 showed 21.4% growth in revenue to £1.3bn, highlighting the continued strong performance of the business. It also found itself with what it called ‘’healthy liquidity’’, with a cash balance of £1.7bn. This provides stability, possibly giving investors confidence about the future. However, it’s worth noting that pre-tax losses were around £24m. Since its creation, it has rarely made a profit, which does lead me to question whether Ocado is currently overpriced. 

One key point in its favour compared to other grocers that operate online is its customer fulfilment centres.  These allowed Ocado to outperform rivals during the pandemic. Rivals could not always cope with the high demand, but Ocado’s automated systems streamlined the preparation of deliveries. Innovations like this make me optimistic for the future of the business.

Ocado share price risks

Of course, despite the potential I see, I have to consider the risks too. One major potential risk is a lawsuit the firm’s currently involved in. Norwegian robotics company AutoStore has filed complaints in the UK and US claiming Ocado’s automated warehouse systems infringe its patents. A successful lawsuit would block the import, manufacture, sale, and use of these systems. Sorting out the legal situation will inevitably be a long process, costing the firm money along the way. I believe this could be a reason behind the fall in the Ocado share price and I’m wary that the longer the lawsuit goes on, the more it may continue to fall.

To add to this, the grocery market is becoming more competitive, which could pose problems. Supermarket chains like Tesco boosted home delivery in the pandemic, while Amazon has also ventured into grocery with Amazon Fresh. This could have a massive impact on future revenues as these operations potentially poach the firm’s customers, directly impacting the Ocado share price.

Should I buy Ocado?

I like Ocado, and don’t believe that the sole reason for the rise in share price over the past few years is due to the pandemic. It’s an innovative business model with strengthening financial results. So why is the Ocado share price falling? I pin it down to the lawsuit and that means I won’t be buying yet. I may be missing out on a great opportunity, but I intend to keep Ocado on my watchlist until the outcome of the lawsuit is clearer.

The post The Ocado share price has fallen: should I buy now? appeared first on The Twelfth Magpie.

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Charlie Keough does not own shares in any of the mentioned companies. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool UK owns shares of and has recommended Amazon. The Motley Fool UK has recommended Ocado Group and Tesco and has recommended the following options: long January 2022 $1,920 calls on Amazon and short January 2022 $1,940 calls on Amazon. 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.

For one, the deal adds extra competition to an already crowded sector that Ocado can’t afford. The entry of Amazon, a deep-pocketed competitor willing to sacrifice margins for volume, signals further price cuts in the market to attract customers. For Ocado, whose operating margins in H1 were a paltry 2.1%, there isn’t much room to attract customers by cutting prices while also investing heavily in expansion efforts.

Competition from Amazon will also be particularly difficult for Ocado because the two companies target the same relatively wealthy customer base. Ocado’s average customer spends roughly £110 per shop, and there’s likely to be significant overlap between these shoppers and those who dish out £79 a year for Amazon Prime. The tie-up between Morrisons and Amazon Prime will also begin rolling out in London and Hertfordshire, Ocado’s geographic heartland.

The end of Ocado?

Is this an immediate deathblow for Ocado? No. The company is still consistently growing sales in double-digits and it has strong competitive advantages in its distribution network and logistics knowledge. But the problem is that these are the same strengths that Amazon is famous for. If Amazon follows its traditional game plan of ignoring margins in order to bring in new customers, Ocado’s relatively weak balance sheet and small size will prove little challenge for the American giant.

What hope does that leave for Ocado? Well, the company desperately needs to land a long-promised contract with an international grocer. Putting its logistics knowhow, tech platform and distribution-related intellectual property to good use overseas in order to escape price wars and low margins at home could be a means of reversing the downward spiral share prices are stuck in. Otherwise, we could be looking at a buyout as Ocado’s best hope of rewarding shareholders.

For Morrisons this deal is a net positive as it expands on the company’s strength in wholesale foods and broadens its geographic reach into areas of the country where it has little presence. It also nicely complements the current turnaround programme that’s focusing on closing non-performing stores and refitting the entire estate by 2018.

This plan drove overall revenue down 1.2% year-on-year in Q3 due to fewer stores but like-for-like sales at retained locations improved a healthy 1.6%. This means the additional sales from the Amazon deal will be very welcome as a way to balance out lower revenue from fewer locations.

Now, this doesn’t mean Morrisons has escaped the increased competition and subsequent price wars that have battered the industry. H1 operating margins remained low at 2.7% and net debt, which is expected to be £1.2bn at year-end, is still worryingly high. The deal with Amazon will be a boost to sales, but price deflation and continued competition from discounters will be constant headwinds going forward for Morrisons.

The post Is Morrisons’ Amazon deal a death blow to Ocado Group plc? appeared first on The Twelfth Magpie.

More reading

• Here are 2 FTSE shares I’m excited about this July — and 1 I’m avoiding
• Can anything save the Ocado share price?

Ian Pierce has no position in any shares mentioned. The Motley Fool UK owns shares of and has recommended Amazon.com. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

From their high points on the day of the announcement on Thursday, Tesco shares had fallen 6% by the end of Friday, with Ocado shares down 7.6% — as I write, Tesco has now shed 33% since late June 2015 to 149p, while Ocado has lost 51% since its July 2015 high point to 231p.

Tesco’s big struggle is against the cut-price bricks-and-mortar supermarket chains of Lidl and Aldi, and one of its few competitive advantages is its online retailing operation. It was the first of the UK’s big supermarkets to offer the service, though it’s not always the pioneers of a new service who end up prospering from it — so online retailing is no guarantee of Tesco’s future success.

Stiff competition

As well as Ocado and the other supermarkets, Tesco is now also up against the muscle of Amazon.com (Nadaq: AMZN), which has launched a groceries delivery service in 69 London postal districts — Amazon Prime subscribers can now get their food shopping delivered, for a fee of £6.99 per month. If that’s successful, we should see further roll-outs to other major UK cities.

Amazon’s existing delivery service is already known for its effectiveness, and for its extensive use of automation to keep wages and costs down, and that’s going to make it a serious competitor for Tesco, and very possibly a contender for the number one spot in the future.

And if it’s bad news for Tesco, it’s even worse news for Ocado, which launched amid great fanfare, but whose shares, to me, have looked seriously overvalued from day one. From its launch in 2010, it took until 2014 for Ocado to turn its first profit, and even in 2015 it only recorded a pre-tax profit of £11.9m. Funding has been tight too, with net debt of £127m reported at the end of November 2015.

Massive valuation

Looking at valuation, based on this year’s forecasts Ocado shares are on a vertigo-inducing P/E  of 110. And even with a 44% rise in EPS pencilled in for 2017, that would still drop to only 76. Ocado needs 2017 forecasts to come good, and then on top of that it needs more than a five-fold rise in earnings per share to get its P/E down to around the long-term FTSE 100 average.

And now Amazon can waltz in with its masses of cash and its full delivery infrastructure already in place, and challenge Ocado’s only real competitive advantage over the tradition supermarkets — its high-technology automation and lower costs.

While Ocado shares already looked overvalued to me, they now look even more unsustainably priced. Current forecasts don’t account for the Amazon factor, and I expect them to be revised downwards in the coming weeks and months — and that would lengthen Ocado’s P/E even further, just when it desperately needs to see it shortening.

Can Ocado survive?

A competitor that probably won’t suffer from Amazon’s entry into the market is Wm Morrison Supermarkets which looks set to benefit from its partnership with Amazon and so offset the extra competition for its own offering online. But I really do see this as bad news for Tesco shareholders — and potentially devastating for Ocado.

The post Should you sell Tesco plc & Ocado Group plc and buy Amazon.com, Inc.? appeared first on The Twelfth Magpie.

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Alan Oscroft has no position in any shares mentioned. The Motley Fool UK owns shares of and has recommended Amazon.com. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

The service, named AmazonFresh is now available to customers in 69 Central and East London postcodes who are members of the online retail giant’s Prime subscription service, for an additional £6.99 a month. The service promises fresh food at every day low prices.

And if successful, the initial trial will be rolled out to other major cities around the UK in the near future.

Bad news for some

The news that Amazon has finally launched its food delivery service is a disaster for struggling online retailer Ocado (LSE: OCDO). Indeed, Ocado’s entire business model is built on the basis that the firm’s proprietary factory technology and machinery, which enables the group to run with minimal staff, would help it out-manoeuvre larger peers such as Tesco, Sainsbury’s and Morrisons.

Amazon is well known for its use of technology to lower staffing costs, and the group’s global dominance means that it can achieve economies of scale that smaller competitors like Ocado just can’t match. Simply put, Ocado has lost its edge, and now AmazonFresh has entered the UK’s cut-throat retail market, life is likely to become a lot harder for the smaller retailer.

AmazonFresh now offers customers a range of more than 130,000 grocery items, including fresh fruit, vegetables, meat, and fish, which means that consumers can now use the service to do their entire weekly grocery shop. What’s more, one of Amazon’s main suppliers for fresh produce is Morrisons, despite the fact that the retailer already has its own website operating in partnership with Ocado. 

It looks as if Morrisons has hedged its bets quite well here. While Ocado stands to lose out significantly from the launch of AmazonFresh, Morrisons is likely to come off unscathed as increased business from its partnership with Amazon is likely to offset sales declines anywhere else.

Struggling retailer

Ocado has struggled to report a consistent profit since its IPO in 2010.The launch of Amazon’s new grocery delivery service will only make it harder for the firm to meet its lofty growth targets going forward. City analysts currently expect the group to report a pre-tax profit of £14.6m for 2016, which translates into earnings per share of 2.4p and a P/E ratio of 108 with the shares at 254p.

As AmazonFresh has only just started its rollout across the capital, City analysts have yet to factor-in the effect the new grocery service will have on Ocado’s earnings. However, Amazon is promising customers rock bottom prices and the Amazon group seems to have an unlimited amount of capital to throw at marketing and investment. So it isn’t overly pessimistic to assume that Ocado will struggle to compete with this new delivery service.

Unfortunately for investors, with Ocado’s shares currently priced for perfection at that 108 times forward earnings figure, if the group fails to meet the City’s lofty growth forecasts, its premium valuation could disappear very quickly.

The post Does the launch of AmazonFresh spell the end for Ocado Group plc? appeared first on The Twelfth Magpie.

More reading

• Here are 2 FTSE shares I’m excited about this July — and 1 I’m avoiding
• Can anything save the Ocado share price?

Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.