Can Ocado's 30% December Surge Keep its Momentum?

Ocado has benefited significantly from expectations of improved UK retail sales over the holidays. However, the company must now deliver results that meet these expectations. 

Growth or Recovery?

Ocado's share price increased almost 30% since the end of November, though this merely returned the stock to its 2023 starting point. The online grocer's valuation has experienced volatility as British consumers grapple with rising costs of living, higher interest rates aimed at slowing borrowing, and potential economic stagnation. Investors have viewed the tech-driven retailer cautiously, with its share price movements closely correlated to risk sentiment but at a likely exacerbated rate. Its recent surge occurred without a major company announcement, following a second bottoming out of its stock price last October. 

Risk appetite improved as the BOE adopted a wait-and-see approach following moderating inflation. With improving price dynamics, Kantar projected Christmas trading would grow 6% to £13 billion, surpassing £11 billion in the prior year. This may have renewed confidence in Ocado, given its Marks & Spencer partnership. M&S's focus on more affluent customers has allowed it to withstand inflation better than its more value-oriented rivals, which have lost share to German discounters. Online grocery demand was forecast to be so strong that warnings were issued that Ocado may struggle to meet demand.

Maintaining Momentum in the New Year

Investors will assess whether Christmas trading results align with exacerbated expectations in the coming weeks. Major supermarket chains will report holiday period performance, with M&S's update likely of particular interest to Ocado shareholders. Ocado will likely announce Q4 results in mid-January if consistent with prior years.

Last year, the stock peaked at over 1000p on speculation of an Amazon acquisition. It did not materialise but could indicate an upside target potential if UK sales trends match forecasts. However, the "bumper" 6% Christmas growth per Kantar is below Ocado's 7% growth in Q3. Ocado's ongoing decline in average basket size is concerning as it focuses on profitability. Ultimately, the timing and size of BOE's interest rate cuts may have a more significant longer-term impact on the share price outlook.​

Ocado Leaves Behind Right Shoulder

A potential inverse head and shoulders pattern could be emerging in the share price of Ocado. With the completion of the right shoulder at 450p likely, there is a possibility of a trend continuation towards the neckline around 1000p. This would require bulls recapturing at least 830p and 900p. If materialised, a breakout above the neckline could confirm the IH&S and a potential upward move towards a longer-term measured-move projection at 1650p. However, if bulls lose 700p and prices reverse towards 620, the chances of invalidating the pattern will increase, bringing the swing low back into focus.

Source: SpreadEx / Ocado

Key Takeaways

Expectations of improved UK retail sales drove Ocado's recent surge of almost 30% in December, but now the company must deliver results to meet these expectations. The price increase brought it back to its 2023 starting point, highlighting the volatility of Ocado's valuation amid rising living costs, higher interest rates, and potential economic stagnation. However, confidence in the company was renewed due to its partnership with Marks & Spencer, which investors will closely watch Christmas trading results in the coming weeks. Factors such as Ocado's declining average basket size and the impact of interest rate cuts by the BOE may also shape the share price outlook.