Should I buy Ocado shares for 2023?

Ocado (LSE: OCDO) shares have fallen far recently. This time two years ago, they were trading above 2,500p. Today, however, it can be picked up for less than 750p.

Is this a good opportunity to buy stocks for my portfolio? Or is Ocado taking risks from here? Let’s have a look.

Two businesses

Ocado has two main business segments.

The first is the home delivery division. Here, partner with M&S to deliver groceries in the UK. Currently, it has almost 2% share of the UK grocery market.

The second is the Ocado Solutions division. It offers end-to-end technology solutions that help other supermarkets move their operations online. Supermarkets that Ocado now serves here include Morrisons, Groupe Casino, and Coles.

So how is the segment performing today?

Mixed performance

Yes, after booming during Covid-19, the retail side of the business has recently collapsed.

For the year ending November 27, sales fell 3.8% year-on-year to £2.2bn. And the company said that inflation, marketing costs, and investment to support future growth will weigh on profitability.

Going forward, the group said it expects single-digit earnings growth by the end of November 28, 2023. It suggests it expects EBITDA (earnings before interest, taxes, depreciation and amortization) to be negative in the first half of the year and positive in the second half.

As for the Solutions side of the business, this seems to be gaining traction. In November, Ocado announced a new partnership with Lotte Shopping – one of South Korea’s largest supermarket companies. This will see the two companies develop a network of robotic warehouses in South Korea to expand Lotte’s online shopping business.

Lotte will pay Ocado fees upfront and during the development phase, then ongoing costs related to sales capacity and installed capacity. And those costs can be significant. Analysts at On the ground estimated to be around £100m at full capacity.

It’s worth noting that Ocado CEO Tim Steiner is confident there are more deals to come. “We are encouraged by our strong pipeline of potential new partners, all of whom recognize the opportunity to transform online channels“he told reporters in November.

Growth potential

I have to admit, I’m pretty excited about the potential of Ocado’s Solutions division. Especially in today’s inflationary environment.

One thing Ocado does is that automation solutions can help supermarkets cut costs. By using automated warehouses, driverless vehicles, and industrial robots, companies can significantly reduce staff costs and beat inflation.

Having said that, this division is a big drain on profitability. For the year ending 27 November 2022, the company is expected to make a net loss of £412m. For this financial year, it is expected to make a net loss of £369m.

This projection is a bit of a turn off for me. In today’s environment, investors don’t have much time for companies that are losing a lot of money.

I’m moving now

Putting all this together, I would leave Ocado shares on my watchlist.

I think enterprise automation technology looks interesting.

However, given the projected losses, I think there are safer stocks to buy in my portfolio right now.