Ocado share price and the convertible bond opportunity
Ocado share price is little changed since Thursday, when it dropped to a low of 1920p. Today, the share price has declined by just 0.05% even as the FTSE 100 index has gained by more than 2%. This wavering is partly because investors are still reflecting on the £1 billion hoard the company raised last week.
Ocado convertible debt opportunity
As we reported last week, Ocado had raised about £1 billion from the market last week. What most retail investors didn’t understand is how the deal was structured. By reading the fine print, we see that the company raised two types of funds. First, it raised £657 million in form of equity to investors. Interestingly, the company raised these funds in exchange of a 5% stake, which means that ordinary investors were not diluted as much.
Second, it raised the rest of the funds through convertible bonds. A convertible bond is usually a win-win situation for a company and the lenders. This is because, the bonds will convert into equity, only if the share price reaches a certain level. In this case, the bonds will convert to equity if Ocado share price reaches 26.46 pounds, a 23% increase from the current valuation. Remember, the lenders of this convertible bonds are not babies. They are among the most sophisticated investors in London, who know what they are doing.
Ocado didn’t need the funds
Another important thing about the fundraising is that Ocado did not need it. That is because the company has more than £1.2 billion in the bank. Instead, the raising was an opportunistic move by the company because of the elevated share price. Ocado share price is up by more than 50% this year because of the excitement of online shopping. Indeed, according to Nielsen, the share of online grocery shopping has almost doubled this year.
Still, there are two challenges for Ocado. First, the company has a problem generating profits. In the past ten years, it has made about £100 million in profit, even after making investments worth more than £1 billion. Second, its model is very expensive because it demands significant investments in technology and warehouses.
Meanwhile, most analysts recommend investing in Ocado share price. In the past week alone, analysts at Shore Capital, Peel Hunt, UBS, Citigroup, and Berenberg have issued buy ratings on the firm.
On the daily chart, Ocado share price is at an inflection point. The shares have found significant support at the 23.6% Fibonacci retracement level. This retracement has been drawn by connecting the lowest and highest points this year. The price is also above the 50-day and 100-day exponential moving averages. A move below this level will see the price move to retest the 38.2% retracement at 1,773p.
On the other hand, a move above the 2000p resistance will see the price continue the upward momentum.