Why are Ocado shares up 5% today?

The Ocado share price (LSE: OCDO) has risen 17% this week, with 5% of those gains made today, but why are Ocado shares rallying?

Broker BNP Paribas has upgraded Ocado’s rating to ‘neutral’ and raised the target price by 3% to 365p, contributing to the positive sentiment surrounding the company. The brokerage firm’s evaluation takes into account Ocado’s improved cost management and spending control, which have resonated well with investors.

Ocado’s financial performance during the pandemic was notable, driven by the surge in demand for home deliveries. However, as restrictions eased and consumers gradually returned to physical stores, online sales faced a decline.

While BNP Paribas acknowledges Ocado’s progress, the outlook for the online grocery sector remains challenging to predict. Ocado still faces challenges in terms of volume growth and managing excess capacity. However, the company’s entry into a more stable phase has sparked optimism among investors.

Ocado’s recent surge in share price also aligns with the positive momentum observed in the US tech stock market. As one of the prominent companies with a proprietary tech platform in the UK, Ocado has managed to attract investor attention.

Despite the recent market excitement, there have been no major news releases from Ocado that would directly explain this surge. However, some analysts believe the rise reflects a fundamental reevaluation of the company rather than a direct response to any specific development or announcement.

There are concerns surrounding Ocado’s cash-hungry business model. Last year, the company’s total revenues experienced minimal growth, with a decline in the retail division’s revenues. While the international solutions business witnessed substantial revenue growth, it remains a relatively small component of Ocado’s overall operations.

Ocado’s pre-tax loss reached a significant amount, accounting for a considerable portion of its current market capitalisation. Furthermore, the company’s net debt rose, and it generated negative cash flow even after issuing shares.

Critics argue that Ocado’s heavy spending and ongoing losses raise doubts about the company’s long-term sustainability and profitability.

Ocado’s investments in building a robust distribution network and customer-specific facilities for renowned global clients could potentially yield long-term profitable contracts. However, the success of this business model remains unproven, and questions have been raised regarding whether Ocado is primarily a scalable tech platform or more akin to a property company due to its increasing focus on property development.

Considering the ongoing financial losses and heavy spending, investors are advised to exercise caution and thoroughly evaluate the investment potential of Ocado, especially in light of its current share price rally.