Why the share price of Ocado has drastically risen or fallen on any given day, is often the question analysts and investors alike might find themselves asking.
The digital grocery and technology business, which is one of the UK’s biggest retail stocks, has found itself in the spotlight for a host of reasons this year including a rumoured takeover from Amazon and a tiff with M&S..
Ocado started off the year strong with the firm’s share price rising 25 per cent in the first two weeks of the year, but then lost 50 per cent of its value in the following six months, according to a report from thefool.co.uk.
Its grocery business which it owns in a joint venture with M&S, has been highly scrutinised by the London market in the past year, as investors seemed unimpressed with its ability to keep up the momentum it gained during the pandemic.
However, the up-market online grocer, which posted a pre-tax loss of £501m in 2022, has since shown signs of regaining momentum with reported a 7.2 per cent surge in revenues to £569.6m in the third quarter.
In June the company’s share price swelled to over 40 per cent following speculation that Amazon was eyeing a takeover of its grocery technology business.
But in September, its shares suffered their worst fall in 11 years, plummeting 20 per cent in one day, after a top City broker downgraded his recommendation to underperform to neutral.
The perpetrator Andrew Gwynn, analyst at BNP, said at the time,: “Ocado has doubled since we moved to neutral from underperform in June so having argued the risk-reward has become more balanced, it seems now to be out of kilter again.”
Ocado was whacked again in October after Barclays downgraded the firm from equalweight to underweight and cut its price target to 480p from 680p.
But, Dr Clive Black, analyst at Shore Capital told City A.M. that day in, day out, there is no “real rhyme or reason to Ocado’s share price”.
“It is volatile and will comfortably shift +/-5 per cent without any new news whatsoever.”
He explained: “The group’s equity is conditioned by big economic and stock market processes, such as the arrival of the pandemic, which led some investors to scramble for online and digital equities, taking Ocado’s shares to 2800p.”
“And then reality dawning alongside rising base rates in response to inflation, which meant firms with no profits, over-investment with poor returns, and breathing on hype and fumes, like Ocado, were found out. Hence, alongside a lot of opportunistic pandemic stories, Ocado’s shares corrected back down to 400p+.”
He added: “A lot of investors seem to like trading around Ocado, its fundamental future trajectory is probably more centred upon whether or not it can make a profit and economic return on its logistics and solutions models, which to date have been more huff & puff than reality.”
Today, Ocado’s share price is up seven per cent. It has recently found itself in the good books of the market after it revealed last week the first deal for its new Ocado Intelligent Automation (OIA) division outside of retail.
Ocado said McKesson Canada, a pharmaceutical company, would use its automation technology at one of its distribution sites.
Russ Mould, investment director at AJ Bell, said: “Although its share price is nowhere near the all-time highs of three years ago, Ocado still commands a stock market valuation of nearly £5bn — a big number for a firm which does not make a profit, according to statutory accounting standards, and which has only £1.7 billion of net assets (or shareholders’ funds).”
“Given the lack of profit — and analysts don’t expect one until the fiscal year to November 2026 at the earliest — the shares are almost bound to be volatile, as true believers in the business model do battle with those who won’t have a word of it.
“The lack of profit also means it is difficult to value the stock in conventional near-term earnings, yield or cashflow metrics.”
He added: “As a result, investors and analysts may need to rely on a discounted cash flow (or DCF ) model where future, long-term cashflow estimates are discounted back to a net present value (NPV), which is then adjusted for cash and debt to provide a theoretical value for the equity (and thus a market cap).”