Grocery delivery and warehouse robotics specialist Ocado Group (LSE: OCDO) is one of the most unpredictable stocks on the entire FTSE 250. It’s seen massive highs and crushing lows over the years, but lately it’s mostly been the latter. Until yesterday…
I remember when the Ocado share price shot up around 500% in a couple of years, fuelled by excitement over its futuristic tech. Investors made fortunes, then lost them again. The shares are down 38% over the last 12 months, and 76% over five years.
While its retail partnership with Marks & Spencer has performed solidly (despite legal spats), its cutting-edge grocery fulfilment centres have struggled to gain enough customers, despite the genius tech. The company remains years away from banking a profit and fell out of the FTSE 100 in June last year.
I haven’t given up on my Ocado shares
As a true contrarian, I saw the peak-to-trough 90% drop in Ocado shares as a buying opportunity. Unfortunately, the pain wasn’t over, and my stake continued to fall.
But yesterday’s staggering 16.29% surge has softened the blow, thanks to a really bullish stock update from JP Morgan Cazenove.
It upgraded Ocado from Neutral to Overweight, and hiked its price target from 340p to 400p. If that came to pass, it would mark a 36% increase from today’s 295p. And just about put me back in the black.
JP Morgan believes Ocado’s global prospects are improving as traditional supermarkets finally realise they can’t ignore online grocery demand forever.
For years, retailers have been hesitant to fully commit to online shopping, fearing it would eat into their margins. Instead, they relied on inefficient store-picking systems to fulfil online orders. But as digital-first supermarkets and giants like Walmart gain market share, traditional grocers may be forced to invest in scalable tech like Ocado’s. That’s the theory anyway.
Huge growth potential but risky
JP Morgan also highlighted that Ocado’s margins are improving in both its retail and solutions divisions. It could even generate positive free cash flow by the end of next year. That’ll come in handy, given that Ocado needs to refinance around £500m in convertible bonds in 2025/26.
The optimist in me says Ocado’s finally turning a corner. But if new deals for its robot centres don’t materialise soon, investor patience could wear thin again.
Also, I’ve been here before. Ocado shares have jumped by double digits several times in the last year, typically after a positive update from the retail arm, only to slide back down.
I’m holding on to my shares, but I’m under no illusions. This will be a long and bumpy recovery. Ocado’s potential is still huge, but the company needs to start delivering on its potential. There are no dividends to ease the pain while we wait.
For investors considering piling in today, my advice would be tread carefully. This could be a turning point, but it might just be another temporary spike.
Despite yesterday’s exciting update, one thing hasn’t changed. Ocado shares will remain a wild ride. This is one stock in my portfolio that really could go either way.
This post was originally published on Motley Fool
