Ocado's [OCDO] share price is soaring as the coronavirus drives demand for online grocery shopping. According to Nielson, UK online grocery volumes hit record levels in the four weeks ending 16 May. Coming in at £1.2 billion, this marks a staggering 103% year-on-year growth. Also giving shareholders confidence is Ocado’s status as a technology supplier for other supermarkets, with several lucrative deals in the pipeline.
Ocado's share price is one of the few to have experienced a real upturn amidst the coronavirus’s devastating impact. Up almost 60% since the start of the year, the stock reached an all-time high of 2,229p through 1 June’s close. While Ocado's share price has cooled off a little since then, it's still trading over the 2,000p level.
Will half-year results see Ocado's share price push past its all-time highs? Or will it begin to fall as UK consumer habits return to normal?
When is Ocado announcing half-year results?
What will move Ocado's share price in the results?
Shift towards online shopping
Lockdown has seen a surge in demand for online grocery shopping. Ocado's first-quarter sales were up 10.3% year-on-year to over £441 million, and second quarter sales promise to be even better. In Ocado's most recent trading statement, the grocer said revenues were up 40.4% year-on-year in the second quarter to 6 May compared to the same time last year.
That said, Ocado cautioned that demand had passed peak levels. If there’s any hint in the results that orders are beginning to return to pre-coronavirus levels, Ocado’s share price gains could slow.
Ocado's YoY rise of revenue in Q2
Technology business keeps expanding
One reason for Ocado's sky-high share price is its tech business. In recent years, Ocado has been busy building futuristic warehouses for global chains. These include Morrisons in the UK and Kroger in the US. Remarkably, the pandemic hasn't disrupted these projects, with Q1 seeing the delivery of warehouses for Groupe Casino in France and Sobeys in Canada.
While the division has been loss-making so far, Ocado could benefit from a substantial revenue stream should it become profitable. Any positive word on how this side of the business is performing could see traders buy further into Ocado as a tech stock.
Update on full-year guidance
In Q1 results, Ocado announced that it had suspended its full-year forecast. This was due to uncertainty over the length of the outbreak and its impact on customer income, which made numbers difficult to predict. It will be interesting to see if Ocado offers any insight, however glancing, on full-year results this time around, with any positive news likely to provide fuel for Ocado's share price.
|Operating Margin (TTM)||-5.18%|
|Quarterly Revenue Growth (YoY)||8.8%|
Ocado share price vitals, Yahoo Finance, 13 July 2020
So, is Ocado a buy?
The big question is whether there has been a lasting shift to online grocery shopping. If there has been, Ocado's share price could be worth buying, despite its high valuation.
According to Fraser Mckevitt, head of retail and consumer insight at Kantar: “While the gains made by online shopping are unlikely to be sustained at these levels, the crisis has certainly accelerated the move towards online. The grocers have attracted a new group of customers, in particular older demographics, and we expect some of them may continue using online services and enjoying the convenience that home delivery provides.”
“While the gains made by online shopping are unlikely to be sustained at these levels, the crisis has certainly accelerated the move towards online” - Fraser Mckevitt, head of retail & consumer insight at Kantar
For investors, it could be worth waiting to see if Ocado's share price dips. This is especially true considering analysts’ price targets for the stock. In the Financial Times, Ocado's share price carries an average 1,320p price target. Hitting this would represent a 34% downside on the current share price (through 10 July’s close). Of the 18 analysts’ ratings, 5 analysts rate it a Buy, but 7 rate Ocado as a Hold.
Disclaimer Past performance is not a reliable indicator of future results.
CMC Markets is an execution-only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.
The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although we are not specifically prevented from dealing before providing this material, we do not seek to take advantage of the material prior to its dissemination.
CMC Markets does not endorse or offer opinion on the trading strategies used by the author. Their trading strategies do not guarantee any return and CMC Markets shall not be held responsible for any loss that you may incur, either directly or indirectly, arising from any investment based on any information contained herein.
*Tax treatment depends on individual circumstances and can change or may differ in a jurisdiction other than the UK.