Ocado Down 50% YTD, Can It Rebound?

One of the fastest-growing online grocers in the United Kingdom may explore opportunities in the United States market, but internal challenges could limit its growth potential.

Leaders and Underperformers

The rising cost of living has undoubtedly impacted United Kingdom consumers. Still, according to recent data from market research firm NIQ, Ocado has managed to be a top performer in the industry. As consumers turn to the internet to find better prices, Ocado achieved sales growth that surpassed discount retailer Lidl in April. However, despite reaffirming guidance, strong sales alone may not convince investors of Ocado's underlying value, given its share price has fallen over 50% year-to-date (YTD).

While continuously growing revenue through the pandemic and an inflationary environment, Ocado remains unprofitable in terms of earnings and cash flow. Some losses can be attributed to ongoing investments to expand its brand. However, the environment does not support discussing large executive bonuses, given tensions between some major shareholders on compensation, which ignores that competitors like Tesco and Marks & Spencer are profitable and provide returns to investors.

Can a Relocation Improve Performance?

Discussions about payment disagreements have led Ocado to seek additional funds from its primary partner, Marks & Spencer, as tensions rise and speculation emerges about potential separation. M&S is the second highest-performing supermarket in the UK, following Ocado. Analysts alternatively propose that the online retailer could divest its retail division and primarily focus on its technology segment, which attracts most of the company's current efforts. The sale could provide an injection of capital, but ensuring the elimination of unprofitability remains uncertain.

Relocating the company listing to the US, where its technological focus may garner greater interest and investment, represents a final potential restructuring to reverse performance declines. The company has denied rumors, with analysts highlighting the partnership with M&S as a major hindrance. However, this underscores the disagreement with investors regarding whether the company functions primarily as a (loss-generating) online retail platform or a technology firm. Until resolving this issue, traders may be displeased about the lack of profits available for dividends and share repurchases, normally elevating interest in a retailer.

Double Bottom: Good or Bad?

Ocado has found support around 335 GBX, forming a double-bottom pattern. While the stock rose approximately 14% on Tuesday, it remains vulnerable to additional declines as long as it continues trading below 430 and the previous swing high at the round 500. However, double bottoms (or tops) typically precede breakouts, especially if the recent momentum fails to trigger more action or reverses fast within a tight range. Therefore, the stock may form a flag and slide lower to around the 300 mark, offering the next critical support at the measured-move low of 280.

Source: SpreadEx / Ocado Group

Key Takeaways

Ocado remains unprofitable, and discussions around executive pay disagreements have led the company to seek additional funds from partner M&S. Some analysts are proposing to divest the retail division and focus on technology with a US relocation potentially reversing recent declines. Until then, while disagreement on whether Ocado functions as an online retail or technology firm continues, Ocado may remain under pressure with no profits for dividends or share repurchases to boost interest.