The outbreak of the pandemic saw a major rise in the Ocado (LSE: OCDO) share price. However, since hitting an all-time high of 2,914p in February, it has fallen and is currently around 35% lower. Back in March, my fellow Fool Manika Premsingh explained why she was buying Ocado. So does this FTSE 100 stock’s share price still have the potential to rise as we seem to be coming out of the pandemic? Let’s take a look.
The first positive is that the pandemic has changed consumer behaviour. At its height, many people switched to online grocery shopping. By August last year, more than three-quarters of consumers ordered at least some of their household shopping from supermarket websites. And I suspect many will continue to shop online, which provides opportunities for the Ocado share price to rise.
This view is reinforced through the firm’s latest financial results. The half-year results for 2021 showed 21.4% growth in revenue to £1.3bn, highlighting the continued strong performance of the business. It also found itself with what it called ‘’healthy liquidity’’, with a cash balance of £1.7bn. This provides stability, possibly giving investors confidence about the future. However, it’s worth noting that pre-tax losses were around £24m. Since its creation, it has rarely made a profit, which does lead me to question whether Ocado is currently overpriced.
One key point in its favour compared to other grocers that operate online is its customer fulfilment centres. These allowed Ocado to outperform rivals during the pandemic. Rivals could not always cope with the high demand, but Ocado’s automated systems streamlined the preparation of deliveries. Innovations like this make me optimistic for the future of the business.
Ocado share price risks
Of course, despite the potential I see, I have to consider the risks too. One major potential risk is a lawsuit the firm’s currently involved in. Norwegian robotics company AutoStore has filed complaints in the UK and US claiming Ocado’s automated warehouse systems infringe its patents. A successful lawsuit would block the import, manufacture, sale, and use of these systems. Sorting out the legal situation will inevitably be a long process, costing the firm money along the way. I believe this could be a reason behind the fall in the Ocado share price and I’m wary that the longer the lawsuit goes on, the more it may continue to fall.
To add to this, the grocery market is becoming more competitive, which could pose problems. Supermarket chains like Tesco boosted home delivery in the pandemic, while Amazon has also ventured into grocery with Amazon Fresh. This could have a massive impact on future revenues as these operations potentially poach the firm’s customers, directly impacting the Ocado share price.
Should I buy Ocado?
I like Ocado, and don’t believe that the sole reason for the rise in share price over the past few years is due to the pandemic. It’s an innovative business model with strengthening financial results. So why is the Ocado share price falling? I pin it down to the lawsuit and that means I won’t be buying yet. I may be missing out on a great opportunity, but I intend to keep Ocado on my watchlist until the outcome of the lawsuit is clearer.
Charlie Keough does not own shares in any of the mentioned companies. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool UK owns shares of and has recommended Amazon. The Motley Fool UK has recommended Ocado Group and Tesco and has recommended the following options: long January 2022 $1,920 calls on Amazon and short January 2022 $1,940 calls on Amazon. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
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