Over the past 15 years, the notion that a company exists to make money for its shareholders has often been cast aside. Many technology companies saw their share prices rocket even as they drowned in red ink. This was partly due to a genuine belief that the losses were necessary for them to grow enough to reach critical scale. However, near-zero interest rates also explain the trend; they meant that investors had little alternative but to be patient. However, with interest rates now back to normal levels, such companies are being battered.
Chief among them is Ocado (LSE: OCDO). This company pioneered the idea of ordering your groceries online and having them delivered to your home. It is so closely associated with online food shopping that it has almost achieved verb status, in the same way that Google is inextricably linked with search engines. Surveys show that 75% of Britons are aware of the brand. But while Google has been able to make billions in profits, Ocado has not succeeded in converting its ubiquity into hard cash.
Ocado's downfall comes as online shopping declines
There are two reasons for this. While online shopping got a big boost during the pandemic, people quickly returned to the shops once restrictions were lifted, which is not surprising given that the vast majority of people in the UK live close to a supermarket. Even today, online shopping only makes up around 13% of food sales in the UK (and a similar figure in the US). Crucially, the supermarkets themselves adapted by launching their own online services, taking advantage of their huge networks. The upshot? Ocado now accounts for barely more than one in 10 online grocery sales.
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Worse, Ocado’s online shop is now embroiled in a legal dispute with Marks & Spencer (which owns 50% of Ocado.com) over payments related to Ocado missing contractual targets. While Ocado is attempting to reinvent itself as a technology company that can help other supermarkets develop their own online operations, this strategy is also running into problems.
Canadian supermarket chain Sobeys recently announced it would delay the opening of its Vancouver customer fulfilment centre, which Ocado was supposed to run. The group also still trades at 0.85 times sales, much more than 0.45 times for Marks & Spencer, 0.31 for Tesco and 0.18 for J Sainsbury – yet all of these companies are making a profit. The shares remain overvalued.
At the same time, all technical indicators suggest that the market is souring on Ocado. The stock has lagged the market by 60% over the last six months, and trades below its 50-day and 200-day moving averages. What’s more, the company was demoted from the FTSE 100 index a few weeks ago. I suggest shorting the shares at their current price of 320p at £6 per 1p. Cover your position at 480p, which would give you a total downside of £960.
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