The Ocado (LSE:OCDO) share price has been on a volatile track the past couple of years. As the pandemic kicked off in 2020, it was one of the few companies that actually saw the share price rise. The online grocery division performed well and had high demand from consumers during the multiple lockdowns. However, over the past year, the share price has fallen just over 50%. So is now the right time to buy?
Pandemic premium gone
One of the reasons for the fall over the past year is the optimism seen regarding Covid-19. Particularly in H2, investors started to cycle out of “stay at home” stocks and head back into “back to work” stocks. This can be seen from other lockdown stocks, such as home exercise bike manufacturer Peloton.
Arguably, Ocado is a well-diversified business with significant revenue outside of the retail division. However, in the eyes of many investors, the gains in the Ocado share price were primarily driven by the pandemic. Some referred to this as the pandemic premium, and so as the outlook and vaccine rollout increased, Ocado shares fell.
As we currently stand, all of this pandemic premium has now been removed with the stock trading at 1,355p. This is one reason why we feel more comfortable buying shares. The valuation has been lowered to a much more palatable level.
A mixed bag of results
Last week saw the release of the full-year results. It was a real mixed bag in our opinion, with the bias being towards it being better than expected. Overall group revenue was up 7.2% versus last year. Strong growth of over 300% was seen from the growing international solutions group, although it still accounts for a fraction of overall revenue.
Importantly, the retail division grew revenue by 4.2% and EBITDA by 1.9%. This helps to show in our opinion that this arm can still grow even with an open economy and no lockdown restrictions. We think that Ocado shares could rally as this cash cow shows steady growth, with overall growth being shown from the solutions and logistics divisions.
Part of this excitement comes from the implementation of new robots that will help the company to operate more efficiently and provide a quicker turnaround time for delivery. This should help it compete better in 2022 against other fast-drop grocery rivals.
Some risks ahead for Ocado shares
Despite the positives mentioned above, we do flag that the 2021 loss before tax was considerably higher than the previous year. At £176.9m, it was significantly higher than the loss of £52.3m in 2020. This was marked down due to increased investment in the solutions business.
Some more traditional investors will raise a valid point as to why invest in Ocado shares when the company is still loss making. After several years, it still hasn’t reached scale whereby it can generate a profit. From that angle, regardless of the current valuation, some might prefer to invest elsewhere, where a price-to-earnings ratio can more accurately identify profitable companies at attractive valuations.
Ultimately, we think that Ocado shares do look a good buy at current levels.