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ocado (LSE: OCDO) shares fell on Tuesday, after the company reported disappointing Christmas sales results and said its grocery retail business would turn a profit. “close to breakeven” in 2023.
Although Ocado’s shares have rebounded from the lows seen in October, the shares have still fallen 50% over the past year.
After such a steep drop, Ocado’s shares are trading at levels previously seen in 2018. However, the company has made considerable progress since then, selling its automated storage technology to a number of large retailers.
It is this FTSE 100 share now starting to look like a contrarian buying opportunity? I’ve been taking a look.
What went wrong?
Ocado’s grocery retail operation is a joint venture with marks and spencer. Figures on Tuesday showed online sales rose just 0.3% to £549m over the final quarter of last year.
Given the impact of the price increases, this means that sales volumes fell. Ocado admits that the average number of items in each order fell 8.3% to 45, compared to the same period in 2021.
On the contrary, both Tesco Y sainsbury reported sales growth of around 5% at the end of last year.
These numbers conclude a bad year for Ocado Retail. The company says revenue for all of 2022 fell 3.8% to £2.2bn. That is the first drop in the company’s history.
Underlying retail earnings for the year are expected to be “close to breakeven”. City analysts had previously expected a figure of around £35m.
Forget retail, technology is the attraction
With grocery sales of just over £2bn, Ocado Retail is too small to challenge the UK’s big supermarkets. Sainsbury’s annual sales are around £30bn, for example.
The real opportunity for Ocado shareholders is the group’s technology division. This provides robotic warehouse systems for other retailers, known as the Ocado Smart Platform.
The company has recruited several major foreign retailers as clients in recent years. These have included US retail giant Hands and more recently the South Korean firm Lotte Shopping.
In a presentation last November, management said that the technology business now has a “a clear path” to generate over £1.1bn in commissions each year, over the medium term. Profit margins on these revenues could be as high as 70%, according to the filing.
If Ocado can deliver on this promise, I think the stock could be cheap at current levels.
My concern is that profitability always seems to be several years in the future. Meanwhile, Ocado needs to keep spending to build customer warehouses and develop its own UK facilities.
Ocado shares: what I would do
Ocado fans say this business could be like Amazonthat lost money for 10 years before becoming profitable.
This may be true. But even if it is, investors will have to be patient. Broker forecasts suggest the group will report a loss of around £350 million in 2023 and £245 million in 2024.
From this perspective, Ocado’s £6.5bn valuation still seems overpriced to me. Unfortunately, I still see this as an action to avoid.
