Is Ocado share price a buy after the £40 million loss?

Ocado
Ocado

Ocado share price tumbled by more than 3% as traders digested the company’s first half results. The shares are trading at 1,963p, which is below a major support as I will explain below. By this decline, Ocado becomes the fourth-worst performing stocks in the FTSE 100 after Avast, and Halma, Scottish Mortgage Investment Trust. So, is the current dip of Ocado stock price a buy?

Ocado earnings summary

For starters, Ocado is one of the biggest technology companies in the UK, valued at more than £10 billion. The company’s product enables consumers to buy items – especially groceries – online. It does this through its relationship with Waitrose. In the coming week, this relationship will shift to Marks and Spencer, the company that it has a joint venture with.

In addition to this, the company licenses its e-commerce solutions to other companies. The most notable client is Kroger, the giant retailer in the United States. This service enables grocery companies to sell online faster. It does this by providing robotics, artificial intelligence, and application technology.

In its half year results, Ocado said that its retail revenue rose by 27% as more people shopped online. It’s revenue from its international segment rose by 58%. It attributed this to its success of opening fulfilment centres in Paris and Toronto.

As a result, its EBITDA declined by 36% to £19.8 million and a loss of £40.6 million. The reason for this is that as its e-commerce sales boomed, so did its costs. This is a common picture we are seeing among retailers in most countries.

A good example of this is Tesco, which had excellent earnings but higher costs. Also, the company continued to invest more. For example, its capital expenditure rose from £112 million in the first half of 2019 to £219 million. The CEO said:

“Over the last six months, my colleagues at Ocado Group have shown, in exceptionally demanding circumstances, the resilience, dedication and innovative spirit that has always characterised this business. I would like to thank them profoundly on behalf of all the stakeholders of Ocado.

So, is it good to invest in Ocado shares?

As we have written before, Ocado is an excellent franchise not only in the United Kingdom but also in other countries. In the past decade, like Amazon, the firm has been spending vast amount of dollars to invest in growth. As a result, the company has not made any substantial profits during this time.

However, as the shift to only grocery purchases accelerates, we expect that Ocado will be a highly profitable company. Most importantly, the firm has created the infrastructure that is difficult for start ups to replicate. Therefore, we believe that Ocado is among the best FTSE 100 company to invest in today.

Ocado share price technical forecast

The daily chart shows that Ocado share price made a major milestone today. It has moved below support line of the wedge pattern that it has been in for the past few days. The price also tested the important 50-day EMA.

Additionally, the price is along the 23.6% Fibonacci retracement level. It has also moved below the psychologically-important support level of 2,000p. Therefore, in the near term, I expect the price to be under pressure as bears target the next support at 1,900p.  On the flip side, a move above back to the ascending wedge will invalidate this thesis.  

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Ocado share price forecast

Ocado share price

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