FTSE 100

Why has the Ocado share price declined by 22% this year?

This year has been relatively disappointing for the Ocado (LON: OCDO) share price. The online grocery specialist has recorded a 22% fall in its shares, while the FTSE 100 index is up 11% over the same time period. That’s a 33 percentage point underperformance over a relatively short period.

Of course, Ocado’s latest trading statement covered a period of two halves. The first six weeks saw the firm perform in line with expectations. However, a fire at one of its distribution centres prompted it to cancel orders in the immediate aftermath. This contributed to a fall in revenue of 19% in the final seven weeks of the quarter. Overall, the company’s revenue was over 10% down versus the same quarter of the previous year.

This performance is likely to have hurt investor sentiment to at least some extent. Investors may also remain concerned about the prospects for the company over the coming years. Certainly, the trend towards online grocery shopping has been accelerated by the pandemic. Yet, Ocado is expected to remain a loss-making business over the next few years.

In fact, this year’s expected loss per share of 28p is forecast to narrow to 22p over the next two financial years. This indicates that there is still some way to go until the company is profitable. And, it could be argued that trading conditions have never been more upbeat than the past two years when the number of online shoppers has reached a record high.

While Ocado’s share price could experience an improved performance, a number of sector peers could offer stronger prospects. For example, the likes of Tesco and Sainsbury’s have significant exposure to the online retail marketplace. However, they are expected to deliver black bottom lines over the next few years. This could mean they offer less risk and the prospect of attractive returns.

Certainly, Ocado’s international exposure and the sale of its technology to major retailers in other territories hold substantial long-term growth potential. As such, its shares may deliver an outperformance of the FTSE 100 that reverses their recent underperformance. But, on a relative basis, there may be more favourable risk/reward opportunities available elsewhere at the present time.

Not Investment Advice Note: Views expressed are those of the writer. The author does not own any stocks mentioned. The article is information, not advice. Share prices can rise and fall. Past returns are not a guide to the future. Please do your own research.

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