Earnings: why Ocado shares are nosediving today

Ocado (LSE: OCDO) shares plummeted 7.6% today after the online grocery company announced its full year results. This now means the stock is 58% lower than it was 12 months ago. Indeed, since peaking at over £28 per share just two years ago, the stock has lost 79% of its market value!

The pandemic – when home deliveries soared along with Ocado’s share price – now seems like a distant memory. But should I buy the shares at 577p for the long term potential?

more loss

In the year to 27 November 2022, the company reported group revenue of £2.5bn, which was flat compared to the previous year. Pre-tax losses widened to £501m, up from £177m a year earlier. Analysts have forecast an annual loss of ‘just’ £399m.

The company has two sides of the business. Ocado Retail is a joint venture with grocery delivery Marks & Spencer. Ocado Solutions builds robots and software for other online retailers around the world.

The company says that “challenging year” for Ocado Retail, as sales fell by 3.8%. However, this was offset by continued growth on the Solutions side of the business, where international revenue more than doubled to £148m from £67m in FY21.

Bright spot

Ocado Retail’s active customer base grew by 13% year-on-year to 940,000. The problem is that customers are putting fewer items in their online carts because of higher food prices. The average basket size fell to 46 items last year from 52 the year before, reducing the average price to £118 from £129.

But going forward, there should be continued revenue growth in the Solutions segment as more Customer Fulfillment Centers (CFCs) operate. It’s an automated warehouse built and operated by Ocado for its partners, where a fleet of robots zips about fulfilling grocery orders.

The company will earn revenue from each new CFC and has the ability to add new modules to existing centers if needed. Over time, the center should help clients reduce costs, as automated selection by industrial robots can reduce staff costs and increase efficiency.

For 2023, Ocado is guiding for mid-single digit growth in Ocado Retail and 40% growth in the Solutions division.

Should I buy shares?

The company has more than £1bn of cash on its balance sheet. Management expects this to be sufficient to fund around four to six years of further investment, during which the group expects to be cash-flow positive. Then expect cash flow from existing CFCs to be sufficient to fund future investments.

If this is the case, then investing now can be a profitable move. After all, Amazon loss-making for many years before finally churning out mountains of free cash and making shareholders much richer.

However, I don’t think we’re seeing an Amazon-type situation here. I think Ocado’s profits will ultimately be incremental rather than explosive. And of course, there’s a risk that won’t happen.

All things considered, there is enough here with the technology side of the business to keep me interested. I may become a shareholder one day, but for now I keep the shares on my watch list.