Over the course of the past year, I’ve really struggled to find good reasons to buy Ocado (LSE:OCDO) shares. In fairness, the shares have fallen by 18% over this period. Yet the company does remain a favourite with some investors who think the growth stock is undervalued. Last week, the share price jumped almost 8%, making it one of the best performers in the FTSE 100. Here’s why I’m still not convinced.
A partnership buyout?
The reason for the pop in Ocado shares was down to speculation around Marks and Spencer. On Friday, a leading investment bank commented that M&S could look to acquire the rest of the partnership made with Ocado last year.
Ocado used to work in partnership with Waitrose, but switched this for M&S in 2020. Ocado Retail was a 50/50 deal with the supermarket. The rumours from last week are that M&S could look to purchase the other 50% from Ocado.
The main reason for this is that M&S is in a much better position than in previous years. I wrote about the stock last week, praising the half-year results and momentum it has. With this in mind, the business now has the money to act… if it wants to. Product sales with Ocado contributed 27% of total sales in its latest results.
The cash benefit would be of use for Ocado, which is the main reason for the jump in my opinion. But is this really a great move if the deal presents itself? Wouldn’t it be better for Ocado to remain 50/50 on this partnership that’s clearly delivering good results? I think so.
Still unsure about Ocado shares
If I put the chatter to one side, my concerns around Ocado remain. The main one that I have is that the company is still making losses. This comes despite it being an established business that has reached full speed. It’s no longer a start-up where losses can be accepted in the hope of growth. The company had revenue of £1.3bn in the first half of this year. It’s a fully-fledged FTSE 100 stock.
So when it generated a net loss of £23.6m in H1, I wasn’t impressed. It was a smaller loss than the £40.6m from the same period last year, but 2020 was a period when the retail division saw a huge demand increase from the pandemic.
Personally, if Ocado can’t make a profit in this market, I don’t think it’s a viable long-term investment for me.
There are others that don’t agree with me on this regarding Ocado shares. I do see the other side of the coin. The network of logistics being grown in the UK and abroad by the division should yield future benefits. The strong push towards customer fulfillment centres is a strategy that could work.
Ultimately, the pop higher last week was mostly down to speculation. Putting that to one side, I don’t see value in buying Ocado shares right now, so will stay away.
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Jon Smith has no position in any share mentioned. The Motley Fool UK has recommended Ocado Group. 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.
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