The recent stock market correction, coupled with macroeconomic headwinds, has put pressure on Ocado (LSE:OCDO) shares. Is there now an opportunity to buy cheaper shares in this growth stock?
Ocado shares continue to fall
As a quick reminder, Ocado is a joint venture between retail behemoth Marks & Spencer and Ocado Group. It is one of the biggest online grocers in the UK and has also ventured into online warehousing tech. It plans to sell this to other retailers.
So what’s been happening with the Ocado share price recently? Well, as I write, the shares are trading for 849p. At this time last year, the shares were trading for 1,889p, which is a 55% decline over a 12-month period.
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I believe that Ocado shares have fallen substantially for a few reasons. As mentioned above, macroeconomic factors such as rising inflation, rising costs, and the pandemic-snarled supply chain have hindered progress.
In addition to this, geopolitical issues in Ukraine, coupled with the aforementioned macroeconomic issues, caused a stock market correction. Many investors have moved away from growth tech stocks to safer defensive options.
The bull and bear case
I often find that tech stocks like Ocado possess high valuations due to their ability to scale their business. In other words, building a platform requires lots of investment and time upfront, but adding new users is usually the easier side of the coin with lower costs to continue to boost its customer base. Ocado saw its customer numbers increase by 22.4% in the last financial year to hit 832,000. I believe its investment to date could help boost its performance in the longer term.
Ocado’s retail warehousing tech, such as robotic warehouses, could be the key to its growth and future profitability. It is relying on strategic partnerships to unlock value and boost performance. A good example of such a partnership is one with Groupe Casino, signed in February 2022. This will help boost Ocado’s profile and presence throughout France.
So what about the negatives then? Well, Ocado has never paid a dividend and is currently loss-making. The argument I made earlier is that heavy investment now could mean future profitability but no one can predict the future.
In addition to this, current inflationary pressures are squeezing Ocado’s profit margins in the online grocery sector. There is no sign of inflation slowing. In fact, the British Chambers of Commerce said inflation could hit double-digit figures in the coming months.
The current cost of living crisis could hurt Ocado too. Consumers are spending less and looking for more bang for their buck. This has prompted the rise of budget supermarket competitors gaining market share in recent years such as Aldi and Lidl.
A growth stock I’d avoid
When weighing up the pros and cons of buying Ocado shares for my holdings my decision right now is an easy one. I would avoid them but keep a keen eye on developments.
The fact that the business is loss-making contributed heavily towards my conclusion. Furthermore, macroeconomic issues show no signs of easing, which could continue to affect Ocado’s growth and profitability.
